**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**
| **x**                                                                                                                                                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                   |       |                                                                                                     |
| **For the  quarterly period ended September 30, 2006**                                                                                                                                 |
|                                                                                                                                                                                   |       |                                                                                                     |
| **OR**                                                                                                                                                                                 |
|                                                                                                                                                                                   |       |                                                                                                     |
| o                                                                                                                                                                                      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                   | ** ** | ** **                                                                                               |
| **For the  transition period  from            to            ** |
| ** **                                                                                                                                                                             | ** ** | ** **                                                                                               |
| **Commission  file number 000-31511**                                                                                                                                                  |

 

**@Road, Inc.**

(Exact name of registrant as specified in its charter)

| **Delaware**                     |   | **94-3209170**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**47071 Bayside Parkway**

**Fremont, CA 94538**

(Address of principalexecutive offices, including zip code)

**510-668-1638**

(Registrant’s telephonenumber, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  x    No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No    x

As of November 1, 2006there were 61,800,504 shares of the registrant’s Common Stock outstanding.

 

----

**INDEX**
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                             | 1  |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
|         | Item 1.  Financial Statements                                                                                                                                    | 1  |
|         | Condensed Consolidated Balance Sheets as of September  30, 2006 and December 31, 2005                                                                            | 1  |
|         | Condensed Consolidated Statements of Operations for  the three and nine months ended September 30, 2006 and 2005 (As Restated)                                        | 2  |
|         | Condensed Consolidated Statements of Stockholders’  Equity for the nine months ended September 30, 2006, December 31, 2005 and  September 30, 2005 (As Restated) | 3  |
|         | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2006 and 2005 (As Restated)                                                  | 4  |
|         | Notes to Condensed Consolidated Financial Statements                                                                                                                  | 5  |
|         | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                              | 23 |
|         | Item 3. Quantitative and Qualitative Disclosures  About Market Risk                                                                                              | 45 |
|         | Item 4. Controls and Procedures                                                                                                                                  | 46 |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                                 | 48 |
|         | Item 1.  Legal Proceedings                                                                                                                                       | 48 |
|         | Item 1A. Risk Factors                                                                                                                                            | 48 |
|         | Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                                  | 49 |
|         | Item 3. Defaults Upon Senior Securities                                                                                                                               | 49 |
|         | Item 4. Submission of Matters to a Vote of Security  Holders                                                                                                          | 49 |
|         | Item  5. Other Information                                                                                                                                            | 49 |
|         | Item 6. Exhibits                                                                                                                                                 | 49 |

 

----

 

**PARTI. FINANCIAL INFORMATION**

**Item 1. Financial Statements.**

**@Road,Inc.**

**Condensed Consolidated Balance Sheets**

**(In thousands, except per share data)(unaudited)**
| ** **                                                                                                                                                                                             | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                        |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                             |       | $                            | 17,015     |                        | $          | 25,773 |   |
| Short-term  investments                                                                                                                                                                                |       | 77,458                       |       | 77,643                      |       |
| Accounts  receivable, net                                                                                                                                                                              |       | 16,950                       |       | 12,475                      |       |
| Inventories                                                                                                                                                                                            |       | 17,146                       |       | 6,087                       |       |
| Deferred product  costs                                                                                                                                                                                |       | 16,512                       |       | 16,187                      |       |
| Deferred tax  assets                                                                                                                                                                                   |       | 1,178                        |       | 1,448                       |       |
| Prepaid expenses  and other                                                                                                                                                                            |       | 1,740                        |       | 2,566                       |       |
| Total current  assets                                                                                                                                                                                  |       | 147,999                      |       | 142,179                     |       |
| Property and equipment,  net                                                                                                                                                                           |       | 7,673                        |       | 6,195                       |       |
| Deferred product costs                                                                                                                                                                                 |       | 24,930                       |       | 16,995                      |       |
| Deferred tax assets                                                                                                                                                                                    |       | 41,000                       |       | 39,843                      |       |
| Goodwill                                                                                                                                                                                               |       | 13,341                       |       | 13,341                      |       |
| Intangible assets, net                                                                                                                                                                                 |       | 24,303                       |       | 27,333                      |       |
| Other non-current  assets                                                                                                                                                                              |       | 737                          |       | 400                         |       |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                           |       | $                            | 259,983    |                        | $          | 246,286 |   |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| **LIABILITIES,  REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**                                                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                                   |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                       |       | $                            | 10,744     |                        | $          | 6,653 |   |
| Accrued  liabilities                                                                                                                                                                                   |       | 8,975                        |       | 8,751                       |       |
| Deferred revenue  and customer deposits                                                                                                                                                                |       | 20,379                       |       | 15,495                      |       |
| Derivative  instrument                                                                                                                                                                                 |       | 6,899                        |       | 1,457                       |       |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total current  liabilities                                                                                                                                                                             |       | 46,997                       |       | 32,356                      |       |
| Deferred revenue                                                                                                                                                                                       |       | 22,813                       |       | 17,333                      |       |
| Deferred tax  liabilities                                                                                                                                                                              |       | —                       |       | 323                         |       |
| Derivative instrument                                                                                                                                                                                  |       | —                       |       | 1,457                       |       |
| Other long-term liabilities                                                                                                                                                                            |       | 395                          |       | 461                         |       |
| Total  liabilities                                                                                                                                                                                     |       | 70,205                       |       | 51,930                      |       |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| Commitments and  contingencies (Note 11)                                                                                                                                                               |       |                         |       |                        |       |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| Preferred stock, $0.001  par value, 10,000 shares authorized, 98 shares designated as redeemable  preferred stock, shares issued and outstanding: 77 at September 30, 2006 and  December 31, 2005 |       | 8,556                        |       | 8,184                       |       |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                             |       |                         |       |                        |       |
| Common stock, $0.0001  par value, 250,000 shares authorized, shares issued and outstanding: 61,760  at September 30, 2006 and 61,154 at December 31, 2005                                         |       | 270,051                      |       | 265,347                     |       |
| Note receivable from  stockholder                                                                                                                                                                      |       | (4                           | )          | (7                          | )          |
| Accumulated other  comprehensive loss                                                                                                                                                                  |       | (23                          | )          | (78                         | )          |
| Accumulated deficit                                                                                                                                                                                    |       | (88,802                      | )          | (79,090                     | )          |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total stockholders’  equity                                                                                                                                                                       |       | 181,222                      |       | 186,172                     |       |
|                                                                                                                                                                                                   |       |                         |       |                        |       |
| Total liabilities, redeemable preferred stock and stockholders’  equity                                                                                                                           |       | $                            | 259,983    |                        | $          | 246,286 |   |

 

See notes to condensed consolidated financial statements.

1

----

**@Road, Inc.Condensed Consolidated Statements of Operations**

**(In thousands, except per share data)(unaudited)**
| ** **                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | ** **                                           | ** ** | **As Restated**                                | ** ** | ** ** | ** ** | **As Restated** | ** ** |
| ** **                                                                    | ** ** | ** **                                           | ** ** | **(See Note 1)**                          | ** ** | ** ** | ** ** | **(See Note 1)** | ** ** |
| Revenues:                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Hosted                                                                        |       | $                                                    | 21,201     |                                                | $          | 18,965 |   | $ | 61,806 |   | $ | 58,140 |   |
| Licensed                                                                      |       | 3,954                                                |       | 6,004                                               |       | 11,295 |   | 7,447 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Total revenues                                                                |       | 25,155                                               |       | 24,969                                              |       | 73,101 |   | 65,587 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and  expenses:                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of hosted revenue (excluding intangibles  amortization included below)   |       | 11,369                                               |       | 10,238                                              |       | 33,716 |   | 28,989 |   |
| Cost of licensed revenue (excluding intangibles  amortization included below) |       | 1,205                                                |       | 1,481                                               |       | 3,562 |   | 3,654 |   |
| Intangibles amortization                                                      |       | 1,010                                                |       | 1,010                                               |       | 3,030 |   | 2,477 |   |
| Sales and marketing                                                           |       | 5,359                                                |       | 5,496                                               |       | 16,783 |   | 15,975 |   |
| Research and development                                                      |       | 3,922                                                |       | 3,487                                               |       | 11,801 |   | 9,911 |   |
| General and administrative                                                    |       | 4,498                                                |       | 4,724                                               |       | 14,468 |   | 13,113 |   |
| In-process research and development                                           |       | —                                               |       | —                                              |       | — |   | 5,640 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Total costs and expenses                                                      |       | 27,363                                               |       | 26,436                                              |       | 83,360 |   | 79,759 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from  operations                                                         |       | (2,208                                               | )          | (1,467                                              | )          | (10,259 | ) | (14,172 | ) |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Other (expense)  income, net:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income, net                                                          |       | 1,204                                                |       | 781                                                 |       | 3,317 |   | 2,128 |   |
| Change in derivative instrument liability                                     |       | (2,969                                               | )          | 4,845                                               |       | (3,985 | ) | 772 |   |
| Other income (expense), net                                                   |       | 339                                                  |       | 17                                                  |       | 317 |   | (135 | ) |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Total other (expense) income, net                                             |       | (1,426                                               | )          | 5,643                                               |       | (351 | ) | 2,765 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net (loss)  income before income taxes                                        |       | (3,634                                               | )          | 4,176                                               |       | (10,610 | ) | (11,407 | ) |
| Benefit from  income taxes                                                    |       | 164                                                  |       | 33,822                                              |       | 898 |   | 37,017 |   |
| Net (loss)  income                                                            |       | (3,470                                               | )          | 37,998                                              |       | (9,712 | ) | 25,610 |   |
| Preferred stock  dividends                                                    |       | (127                                                 | )          | (124                                                | )          | (377 | ) | (305 | ) |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net (loss)  income attributable to common stockholders                        |       | $                                                    | (3,597     | )                                                   | $          | 37,874 |   | $ | (10,089 | ) | $ | 25,305 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net (loss)  income per share:                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                         |       | $                                                    | (0.06      | )                                                   | $          | 0.62 |   | $ | (0.16 | ) | $ | 0.42 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted                                                                       |       | $                                                    | (0.06      | )                                                   | $          | 0.61 |   | $ | (0.16 | ) | $ | 0.41 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Shares used in  calculating net (loss) income per share:                 |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                         |       | 61,721                                               |       | 60,740                                              |       | 61,484 |   | 59,571 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted                                                                       |       | 61,721                                               |       | 62,133                                              |       | 61,484 |   | 60,994 |   |

 

See notes to condensed consolidated financialstatements.

2

----

**@Road,Inc.**

**Condensed Consolidated Statements of Stockholders’Equity**

**For the PeriodsEnded September****30, 2006, December 31,2005 (As Restated)**

**and September****30, 2005 (As Restated)**

**(In thousands) (unaudited)**
| ** **                                                              | ** ** | **Common Stock** | ** ** | **Note  Receivable  From** | ** ** | **Accumulated   Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Total  Comprehensive** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|---------------------------------------------|------------|-----------------|------------|------------------------|------------|--------------------------|------------|
| ** **                                                              | ** ** | **Shares**            | ** ** | **Amount**                 | ** ** | **Stockholder**                             | ** ** | **Loss**        | ** ** | **Deficit**            | ** ** | **Equity**               | ** ** | **Income (Loss)** | ** ** |
| BALANCES,  January 1, 2005                                         |       | 54,805                |       | $                          | 232,016    |                                        | $          | —          |       | $                      | (179       | )                        | $          | (107,001 | ) | $ | 124,836 |   |   |   |
| Net income (As  Restated) (See Note 1)                             |       |                  |       |                       |       |                                        |       |            |       | 25,610                 |       | 25,610                   |       | $ | 25,610 |   |
| Change in  unrealized loss on short-term investments                    |       |                  |       |                       |       |                                        |       | 114             |       |                   |       | 114                      |       | 114 |   |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Comprehensive  income (As Restated) (See Note 1)                        |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       | $ | 25,724 |   |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Shares issued  upon acquisition of Vidus, net of issuance costs of $478 |       | 5,454                 |       | 24,228                     |       |                                        |       |            |       |                   |       | 24,228                   |       |   |   |
| Fully vested  options issued upon acquisition of Vidus                  |       |                  |       | 531                        |       |                                        |       |            |       |                   |       | 531                      |       |   |   |
| Shares issued  under employee stock purchase plan                       |       | 295                   |       | 849                        |       |                                        |       |            |       |                   |       | 849                      |       |   |   |
| Exercise of stock  options                                              |       | 213                   |       | 383                        |       |                                        |       |            |       |                   |       | 383                      |       |   |   |
| Issuance of note  receivable to stockholder                             |       |                  |       |                       |       | (11                                         | )          |            |       |                   |       | (11                      | )          |   |   |
| Collection of  note receivable from stockholder                         |       |                  |       |                       |       | 3                                           |       |            |       |                   |       | 3                        |       |   |   |
| Dividends on  redeemable preferred stock                                |       |                  |       | (305                       | )          |                                        |       |            |       |                   |       | (305                     | )          |   |   |
| Tax benefit on  the exercise of employee stock options                  |       |                  |       | 6,671                      |       |                                        |       |            |       |                   |       | 6,671                    |       |   |   |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  September 30, 2005 (As Restated) (See Note 1)           |       | 60,767                |       | 264,373                    |       | (8                                          | )          | (65             | )          | (81,391                | )          | 182,909                  |       |   |   |
| Net income                                                         |       |                  |       |                       |       |                                        |       |            |       | 2,301                  |       | 2,301                    |       | $ | 2,301 |   |
| Change in  unrealized loss on short-term investments                    |       |                  |       |                       |       |                                        |       | (13             | )          |                   |       | (13                      | )          | (13 | ) |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Comprehensive  income                                                   |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       | $ | 2,288 |   |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Shares issued  under employee stock purchase plan                       |       | 285                   |       | 829                        |       |                                        |       |            |       |                   |       | 829                      |       |   |   |
| Exercise of stock  options                                              |       | 102                   |       | 195                        |       |                                        |       |            |       |                   |       | 195                      |       |   |   |
| Collection of  note receivable from stockholder                         |       |                  |       |                       |       | 1                                           |       |            |       |                   |       | 1                        |       |   |   |
| Dividends on  redeemable preferred stock                                |       |                  |       | (131                       | )          |                                        |       |            |       |                   |       | (131                     | )          |   |   |
| Tax benefit on  the exercise of employee stock options                  |       |                  |       | 81                         |       |                                        |       |            |       |                   |       | 81                       |       |   |   |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| BALANCES,  December 31, 2005                                       |       | 61,154                |       | 265,347                    |       | (7                                          | )          | (78             | )          | (79,090                | )          | 186,172                  |       |   |   |
| Net loss                                                                |       |                  |       |                       |       |                                        |       |            |       | (9,712                 | )          | (9,712                   | )          | $ | (9,712 | ) |
| Change in  unrealized loss on short-term investments                    |       |                  |       |                       |       |                                        |       | 55              |       |                   |       | 55                       |       | 55 |   |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Comprehensive  loss                                                     |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       | $ | (9,657 | ) |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| Shares issued  under employee stock purchase plan                       |       | 314                   |       | 941                        |       |                                        |       |            |       |                   |       | 941                      |       |   |   |
| Exercise of stock  options                                              |       | 292                   |       | 763                        |       |                                        |       |            |       |                   |       | 763                      |       |   |   |
| Stock-based  compensation                                               |       |                  |       | 3,163                      |       |                                        |       |            |       |                   |       | 3,163                    |       |   |   |
| Collection of  note receivable from stockholder                         |       |                  |       |                       |       | 3                                           |       |            |       |                   |       | 3                        |       |   |   |
| Dividends on  redeemable preferred stock                                |       |                  |       | (377                       | )          |                                        |       |            |       |                   |       | (377                     | )          |   |   |
| Excess tax  benefit on the exercise of employee stock options           |       |                  |       | 214                        |       |                                        |       |            |       |                   |       | 214                      |       |   |   |
|                                                                    |       |                  |       |                       |       |                                        |       |            |       |                   |       |                     |       |   |   |
| BALANCES, September 30,  2006                                           |       | 61,760                |       | $                          | 270,051    |                                        | $          | (4              | )          | $                      | (23        | )                        | $          | (88,802 | ) | $ | 181,222 |   |   |   |

 

See notes to condensed consolidated financial statements.

3

----

**@Road,Inc.**

**Condensed Consolidated Statements ofCash Flows**

**(In thousands) (unaudited)**
| ** **                                                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                                                                                     | ** ** | ** **                                          | ** ** | **As Restated** | ** ** |
| ** **                                                                                                     | ** ** | ** **                                          | ** ** | **(See Note 1)** | ** ** |
| Cash flows from  operating activities:                                                                         |       |                                                |       |   |   |
| Net (loss)  income                                                                                             |       | $                                                   | (9,712     | ) | $ | 25,610 |   |
| Adjustments to  reconcile net (loss) income to net cash used in operating activities:                          |       |                                                |       |   |   |
| Depreciation and amortization                                                                                  |       | 5,467                                               |       | 4,319 |   |
| Tax benefit on the exercise of employee stock  options                                                         |       | —                                              |       | 6,671 |   |
| Stock-based compensation                                                                                       |       | 3,163                                               |       | — |   |
| Change in derivative instrument liability                                                                      |       | 3,985                                               |       | (772 | ) |
| Provision for doubtful accounts and sales returns                                                              |       | (237                                                | )          | 58 |   |
| Loss on disposal of property and equipment                                                                     |       | 74                                                  |       | 48 |   |
| Provision for inventory reserves                                                                               |       | 77                                                  |       | 337 |   |
| In-process research and development                                                                            |       | —                                              |       | 5,640 |   |
| Deferred taxes                                                                                                 |       | (1,210                                              | )          | (43,688 | ) |
| Changes in assets and liabilities, net of effect of  acquisition:                                              |       |                                                |       |   |   |
| Accounts receivable                                                                                            |       | (4,238                                              | )          | (6,607 | ) |
| Inventories                                                                                                    |       | (11,131                                             | )          | (2,312 | ) |
| Deferred product costs                                                                                         |       | (8,265                                              | )          | (15,341 | ) |
| Prepaid expenses and other                                                                                     |       | 489                                                 |       | (571 | ) |
| Accounts payable                                                                                               |       | 4,091                                               |       | 2,589 |   |
| Accrued and other liabilities                                                                                  |       | 158                                                 |       | 657 |   |
| Deferred revenue and customer deposits                                                                         |       | 10,364                                              |       | 9,829 |   |
|                                                                                                           |       |                                                |       |   |   |
| Net cash used in operating activities                                                                          |       | (6,925                                              | )          | (13,533 | ) |
|                                                                                                           |       |                                                |       |   |   |
| Cash flows from  investing activities:                                                                         |       |                                                |       |   |   |
| Purchase of property and equipment                                                                             |       | (3,989                                              | )          | (3,101 | ) |
| Purchase of short-term investments                                                                             |       | (54,170                                             | )          | (75,341 | ) |
| Proceeds from the sale of short-term investments                                                               |       | 54,410                                              |       | 125,723 |   |
| Acquisition of Vidus, net of cash acquired                                                                     |       | —                                              |       | (6,851 | ) |
|                                                                                                           |       |                                                |       |   |   |
| Net cash (used in) provided by investing activities                                                            |       | (3,749                                              | )          | 40,430 |   |
|                                                                                                           |       |                                                |       |   |   |
| Cash flows from  financing activities:                                                                         |       |                                                |       |   |   |
| Proceeds from sale of common stock                                                                             |       | 1,704                                               |       | 1,232 |   |
| Proceeds from payment on note receivable issued to  stockholder                                                |       | 3                                                   |       | 3 |   |
| Payment for redemption of redeemable preferred stock                                                           |       | (5                                                  | )          | — |   |
| Excess tax benefit on the exercise of employee stock  options                                                  |       | 214                                                 |       | — |   |
| Net cash provided by financing activities                                                                      |       | 1,916                                               |       | 1,235 |   |
|                                                                                                           |       |                                                |       |   |   |
| Net  (decrease) increase in cash and cash equivalents                                                     |       | (8,758                                              | )          | 28,132 |   |
| Cash and cash equivalents:                                                                                     |       |                                                |       |   |   |
| Beginning of period                                                                                            |       | 25,773                                              |       | 14,494 |   |
| End of period                                                                                                  |       | $                                                   | 17,015     |   | $ | 42,626 |   |
|                                                                                                           |       |                                                |       |   |   |
| Supplemental  disclosure of cash flow information:                                                             |       |                                                |       |   |   |
| Dividends accrued on redeemable preferred stock                                                                |       | $                                                   | 377        |   | $ | 305 |   |
| Change in unrealized loss on short-term investments,  net of tax effects                                       |       | $                                                   | 55         |   | $ | 114 |   |
| Cash paid for income taxes                                                                                     |       | $                                                   | 116        |   | $ | 30 |   |
| Non-cash  investing and financing activities:                                                                  |       |                                                |       |   |   |
| Issuance of  common stock, redeemable preferred stock and options in connection with the  acquisition of Vidus |       | $                                                   | —     |   | $ | 38,155 |   |

 

See notes tocondensed consolidated financial statements.

 

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**@Road, Inc.Notes To Condensed Consolidated Financial Statements**(unaudited)

**Note1 —Summary of Significant Accounting Policies**

***Restatement of Financial Statements***

Subsequentto December 31, 2005, the Company determined that its unaudited quarterlycondensed consolidated financial statements for the periods ended March 31,2005, June 30, 2005 and September 30, 2005 contained errors resulting from theimproper accounting for the common and redeemable preferred stock issued inconnection with the Company’s acquisition of Vidus Limited (“Vidus”) which wascompleted on February 18, 2005. See “Note 6—Derivative Financial InstrumentLiabilities” for further discussion. The Company also identified an error inthe benefit for income taxes related to the reversal of the valuationallowance. 

Theimpact on the Company’s condensed consolidated statements of operations for thethree and nine months ended September 30, 2005 was an increase in net income of$4.5 million and $402,000, respectively. As a result, the accompanyingcondensed consolidated financial statements for the three and nine months endedSeptember 30, 2005 have been restated from the previously reported results tocorrect for these errors. The following is a summary of the significant effectsof the restatement (in thousands, except per share data):
|                                                 | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                      | ** ** | **As Previously  Reported**                               | ** ** | **As  Restated**                                              | ** ** | **Change** | ** ** | **As Previously  Reported** | ** ** | **As  Restated** | ** ** | **Change** | ** ** |
| Change in derivative  instrument liability      |       | $                                                              | —     |                                                          | $          | 4,845 |   | $ | 4,845 |   | $ | — |   | $ | 772 |   | $ | 772 |   |
| Total other  income, net                        |       | 798                                                            |       | 5,643                                                         |       | 4,845 |   | 1,993 |   | 2,765 |   | 772 |   |
| Net (loss)  income before income taxes          |       | (669                                                           | )          | 4,176                                                         |       | 4,845 |   | (12,179 | ) | (11,407 | ) | 772 |   |
| Benefit from  income taxes                      |       | 34,192                                                         |       | 33,822                                                        |       | (370 | ) | 37,387 |   | 37,017 |   | (370 | ) |
| Net income                                      |       | 33,523                                                         |       | 37,998                                                        |       | 4,475 |   | 25,208 |   | 25,610 |   | 402 |   |
| Net income  attributable to common stockholders |       | $                                                              | 33,399     |                                                          | $          | 37,874 |   | $ | 4,475 |   | $ | 24,903 |   | $ | 25,305 |   | $ | 402 |   |
|                                            |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net income per  share:                          |       |                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | $                                                              | 0.55       |                                                          | $          | 0.62 |   | $ | 0.07 |   | $ | 0.42 |   | $ | 0.42 |   | $ | 0.00 |   |
| Diluted                                         |       | $                                                              | 0.54       |                                                          | $          | 0.61 |   | $ | 0.07 |   | $ | 0.41 |   | $ | 0.41 |   | $ | 0.00 |   |

 

***Basis of Consolidation and Presentation***

Theaccompanying condensed consolidated financial statements include@Road, Inc. and its wholly-owned subsidiaries (collectively, the“Company”). Intercompany accounts and transactions are eliminated uponconsolidation.

Theaccompanying condensed consolidated financial statements were prepared by theCompany, without an audit, pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations,although the Company believes the disclosures made herein are adequate to makethe information presented not misleading.

In theopinion of management, the financial statements include all adjustments,consisting only of normal recurring adjustments (except for the adjustments torestate the financial statements for the three and nine months ended September30, 2005 discussed above) necessary to fairly present the financial condition,results of operations, and cash flows for the periods presented. Results ofoperations for the periods presented are not necessarily indicative of resultsto be expected for any other interim period or for the full year. Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s condensed consolidated financial statements and notes thereto inits Annual Report on Form 10-K/A for the year ended December 31, 2005,dated August 9, 2006 and filed with the SEC.

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***Estimates***

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses during the reporting period. On an on-goingbasis, the Company evaluates its estimates, including those related to revenuerecognition, stock-based compensation, intangible assets and goodwill,allowance for doubtful accounts, income taxes and legal and other contingencies.The Company bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances. Actualresults could differ from those estimates.

***Certain Significant Risks and Uncertainties***

TheCompany participates in a dynamic high-technology industry and believes thatadverse changes in any of the following areas could have a material adverseeffect on its future financial position, results of operations or cash flows:the ability of the Company to integrate @Road, Ltd. (formerly Vidus) operationssuccessfully; the ability of the Company to accelerate or continue to grow as aresult of its investment initiatives; the ability of the Company and itsalliances to market, sell and support the Company solutions; the timing ofpurchasing and implementation decisions by prospects and customers;competition; the dependence of the Company on mobile data systems technology,wireless networks, network infrastructure and positioning systems owned and controlledby others; advances and trends in new technologies and industry standards;market acceptance of the Company’s existing or new solutions; development ofsales channels; changes in third-party manufacturers, key suppliers, certainstrategic or customer relationships; litigation or claims against the Companybased on intellectual property, product, regulatory or other factors; and theCompany’s ability to attract and retain employees necessary to support itsgrowth.

Motorolais the sole supplier of microcontrollers and certain modems used in theCompany’s products. Micronet is the sole supplier of our Internet Data TerminalTM (“*i*DT”)device. Everex is the sole supplier of our Internet Location Manager—WiFi (“*i*LM®-W”) device. The Company expects to relyon these suppliers as the sole source for these components and devices for thenext several years.

***Revenue Recognition***

TheCompany follows specific and detailed guidelines in recognizing revenue inaccordance with the provisions of AICPA Statement of Position 97-2, *Software Revenue Recognition*, as amendedby Statement of Position 98-4, *Deferral ofthe Effective Date of the Provisions of SOP 97-2* and Statement ofPosition 98-9, *Modification of SOP 97-2*,as well as Accounting Research Bulletin No. 45, *Long-Term Construction-Type Contracts* and Statement ofPosition 81-1, *Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts*. The Companyrecognizes revenue when the price is fixed and determinable, persuasiveevidence of an agreement exists, the obligations under any such agreement arefulfilled and collectibility is probable.

TheCompany’s revenues are comprised of hosted revenue and licensed revenue. Hostedrevenue is derived from monthly fees for the Company’s Field Force Management(“FFM”) and Field Asset Management (“FAM”) solutions and monthly or upfrontfees for in-vehicle hardware devices enabling a mobile resource to utilizethese FFM or FAM solutions. Licensed revenue is comprised of license fees,installation, training and related post-contract customer support (“PCS”)services fees relating to the Company’s Field Service Management (“FSM”) *Taskforce*TM softwaresolution.

Monthlyfees for the Company’s hosted solutions are recognized ratably over thecontract period, which commences (a) upon installation of the Company’sproprietary hardware devices in customers’ mobile worker vehicles, or(b) upon the creation of subscription licenses and a subscriber account onits website where subscribers have elected to use an @ Road solution with amobile telephone. Upfront fees for the Company’s hosted solution primarilyconsist of amounts for the in-vehicle enabling hardware device and peripherals,if any. The Company defers upfront fees at installation and recognizes themratably over the minimum service contract period, generally one to five years.Product costs are also deferred and amortized over such period. Renewal ratesfor the Company’s hosted solutions are not considered priced at a bargain incomparison to the upfront fees (as described in Staff Accounting BulletinNo. 104, *Revenue Recognition*).If the Company cannot objectively determine the fair value of any undeliveredelement included in hosted arrangements, it defers revenue until all elementsare delivered, all services have been performed or fair value can objectivelybe determined.

Licensed revenueassociated with the fees for the license of the Company’s FSM *Taskforce* product and relatedcustomization and installation services is generally recognized using thepercentage-of-completion method of accounting over the period that services areperformed. For agreements accounted for under the percentage-of-completionmethod, the Company determines progress to

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completion basedon actual direct labor hours incurred to date as a percentage of the estimatedtotal direct labor hours required to complete the project. The Companyevaluates the actual status of each project as of each balance sheet date toensure that the estimates to complete each contract remain accurate. A provisionfor estimated losses on contracts is made in the period in which the lossbecomes probable and can be reasonably estimated. To date, the Company has notincurred any such losses. If the amount of revenue recognized exceeds theamount billed to customers, the excess amount is recorded as unbilled accountsreceivable. If the amount billed exceeds the amount of revenue recognized, theexcess amount is recorded as customer deposits.

TheCompany derives PCS fees from PCS agreements, which are generally initiallypurchased at the same time as a license for its *Taskforce* product. PCS can include telephone and emailsupport and the right to receive unspecified upgrades on awhen-and-if-available basis. PCS agreements may generally be renewed on anannual basis. The Company recognizes revenue for PCS, based on vendor specificobjective evidence (“VSOE”) of fair value, ratably over the term of the PCSperiod. It generally determines VSOE of PCS based on the stated fees for PCSrenewal set forth in the original license agreement. If the Company is unableto establish VSOE of fair value, it recognizes all fees ratably over the termof the PCS, when the only remaining undelivered element is PCS.

Forarrangements with multiple elements, such as licenses, customization servicesand PCS services, the Company allocates revenue to each element based upon itsfair value as determined by VSOE. VSOE for each element is based on normalpricing and discounting practices when the element is sold separately. VSOE forPCS services is measured by the stated renewal rate. If the Company cannotobjectively determine the fair value of any undelivered element included inlicense arrangements, it defers revenue until the earliest of either:(a) all elements are delivered, (b) all services have been performedor only PCS services remain to be delivered, or (c) fair value canobjectively be determined. When the fair value of a delivered element has notbeen established, the Company uses the residual method to record licenserevenue if the fair value of all undelivered elements is determinable. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the fee is allocated to the delivered elements and isrecognized as revenue, assuming all other criteria have been met.

Pursuant to EmergingIssues Taskforce Issue 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement* (“EITF 06-3”), the Company elected to presenttaxes collected from customers and remitted to governmental authorities net inits financial statements consistent with the Company’s historical presentationof this information.

***Comprehensive Loss***

Statementof Financial Accounting Standards (“SFAS”) No. 130,*Reporting Comprehensive Income*, requiresthat an enterprise report, by major components and as a single total, thechange in its net assets during the period from non-owner sources. Accumulated other comprehensive loss was comprised of unrealized losses of $23,000and $78,000 on short-term investments at September 30, 2006 andDecember 31, 2005, respectively.

***Derivative Financial Instruments***

TheCompany does not use derivative instruments to hedge exposures to cash flow,market, or foreign currency risks. In accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities* (“SFAS 133”), certain derivatives embedded in ourSeries B preferred stock are bifurcated and accounted for separately. Theoriginal host instruments were initially reported, at fair value, as PreferredStock and the embedded derivatives were initially reported, at fair value, asliabilities. Because these derivatives do not qualify as hedging instruments,changes in fair values of such derivatives are reported as charges or creditsto income.

***Major Customers***

Forthe three and nine months ended September 30, 2006 AT&T Inc. represented16% of total revenues. For the three and nine months ended September 30, 2005,Verizon accounted for 12% and 14% and British Telecom represented 18% and 7% oftotal revenues, respectively. During the three and nine months ended September30, 2006 and 2005, no other customer represented 10% or more of total revenues.

***Recently Issued Accounting Pronouncements***

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (revised 2004),*Share-Based Payment* (“SFAS 123R”), that addresses theaccounting for stock-based payment transactions in which an enterprise receivesemployee services in exchange for either equity instruments of the enterpriseor liabilities that are based on the fair value of the 

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enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. The statement eliminates the ability to account for stock-basedcompensation transactions using the intrinsic value method as prescribed byAccounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB25”), and generally requires that such transactions be accounted for using afair value based method and recognized as expense in the condensed consolidatedstatement of operations. SFAS 123R also requires additional accounting for thetax benefit on employee stock options and for stock issued under the Company’semployee stock purchase plan. The adoption of SFAS 123R on January 1, 2006, hada material impact on the Company’s results of operations and financialposition. See “Note 9 — Employee Benefit Plans” for additional disclosurerelated to SFAS 123R.

InNovember 2005, the FASB issued FASB Staff Position (“FSP”) Nos. SFAS 115-1and SFAS 124-1, *The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments*.This FSP addresses the determination as to when an investment is consideredimpaired, whether that impairment is other than temporary and the measurementof an impairment loss. This FSP also includes accounting considerationssubsequent to the recognition of other-than-temporary impairments. The adoptionof the FSP did not have a material impact on the Company’s condensedconsolidated statement of operations and financial condition.

OnJune 7, 2005, the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections*, *a replacement of APBOpinion*No. 20, *Accounting Changes,*and Statement No. 3, *Reporting Accounting Changesin Interim Financial Statements* (“SFAS 154”). SFAS 154 changes therequirements for accounting and reporting a change in accounting principle.Previously, most voluntary changes in accounting principles were required to berecognized by way of a cumulative effect adjustment within net income duringthe period of the change. SFAS 154 requires retrospective application to priorperiods’ financial statements, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. SFAS 154 iseffective for accounting changes made in fiscal years beginning afterDecember 15, 2005; however, SFAS 154 does not change the transitionprovisions of any existing accounting pronouncements.

**InJuly 2006, the FASB issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*(“FIN 48”). FIN 48 prescribes acomprehensive model for how a company should recognize, measure, present, anddisclose in its financial statements uncertain tax positions that the companyhas taken or expects to take on a tax return. Under FIN 48, the financialstatements will reflect expected future tax consequences of such positionspresuming the taxing authorities' full knowledge of the position and allrelevant facts, but without considering time values. FIN 48 is effective forthe Company beginning January 1, 2007. The Company has not yet completed itsevaluation of the impact that adoption of FIN 48 will have on theCompany’s condensed consolidated statement of operations and financial condition.**

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, Section N to Topic 1, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*(SAB 108). SAB 108 requires the evaluation of prior-year misstatements usingboth the balance sheet approach and the income statement approach. In theinitial year of adoption should either approach result in quantifying an errorthat is material in light of quantitative and qualitative factors, SAB 108guidance allows for a one-time cumulative-effect adjustment to beginningretained earnings. In years subsequent to adoption, previously undetectedmisstatements deemed material shall result in the restatement of previouslyissued financial statements in accordance with FAS 154. SAB 108 is effectivefor the Company on December 31, 2006. The adoption of SAB 108 will not have animpact on our condensed consolidated statement of operations and financialcondition.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements* (“FAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value, and expands disclosurerequirements regarding fair value measurement. Where applicable, SFAS 157simplifies and codifies fair value related guidance previously issued withingenerally accepted accounting principles (GAAP). SFAS 157, is effective for theCompany beginning January 1, 2008. The Company has not yet completed itsevaluation of the impact that adoption of SFAS 157 will have on the Company’scondensed consolidated statement of operations and financial condition. 

**Note2 — Basic and Diluted Net (Loss) Income per Share**

Basic net (loss)income per share is computed by dividing the net (loss) incomeattributable to common stockholders for the period by the weighted averagenumber of common shares outstanding during the period. Diluted net (loss)income per share is computed by dividing the net (loss) income attributableto common stockholders for the period by the weighted average number of commonshares and potentially dilutive common shares outstanding during the period.Potentially dilutive common shares, composed of unvested restricted commonstock and incremental common shares issuable upon the exercise of stockoptions, are included in diluted net (loss) income per share (using thetreasury stock method) to the extent such shares are dilutive. Potentiallydilutive shares that are anti-dilutive, as calculated based on the weightedaverage closing price of the Company’s common stock for the period, areexcluded from 

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the calculation ofdiluted net (loss) income per share. Common share equivalents areexcluded from the computation in loss periods, as their effect would beanti-dilutive.

Thefollowing table sets forth the computation of basic and diluted net (loss)income per share for the periods indicated (in thousands, except per shareamounts):
|                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net (loss)  income attributable to common stockholders (numerator) |       | $                                                    | (3,597     | )                                                   | $          | 37,874 |   | $ | (10,089 | ) | $ | 25,305 |   |
| Shares  (denominator):                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Basic weighted  average common shares outstanding                  |       | 61,721                                               |       | 60,740                                              |       | 61,484 |   | 59,571 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Dilution impact from option equivalent shares                      |       | —                                               |       | 1,350                                               |       | — |   | 1,399 |   |
| Dilution impact from employee stock purchase plan                  |       | —                                               |       | 43                                                  |       | — |   | 24 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Shares used in  computation                                        |       | 61,721                                               |       | 62,133                                              |       | 61,484 |   | 60,994 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Net (loss)  income  per share                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                              |       | $                                                    | (0.06      | )                                                   | $          | 0.62 |   | $ | (0.16 | ) | $ | 0.42 |   |
| Diluted                                                            |       | $                                                    | (0.06      | )                                                   | $          | 0.61 |   | $ | (0.16 | ) | $ | 0.41 |   |

 

Forthe periods presented, the Company had securities outstanding which couldpotentially dilute basic income per share in the future, but which wereexcluded from the computation of diluted net (loss) income per share inthe periods presented, as their effect would have been anti-dilutive due to theCompany being in a loss position or due to outstanding options with exerciseprices greater than the average fair market value for the respective periodspresented. Such outstanding securities consist of the following (shares inthousands):
|                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                        | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Outstanding options                                     |       | 10,327                                          |       | 5,100                                     |       | 10,327 |   | 4,944 |   |
| Weighted average  exercise price of outstanding options |       | $                                               | 4.81       |                                      | $          | 6.81 |   | $ | 4.81 |   | $ | 7.05 |   |
|                                                         |            |                                                 |            |                                           |            |  |  |  |  |  |  |  |  |

 

**Note 3. —****Business Combinations,Goodwill and Intangible Assets**

OnFebruary 18, 2005, the Company completed the acquisition of Vidus Limited(“Vidus”) in a transaction accounted for as a business combination using thepurchase method. As consideration for the acquisition, the Company issuedapproximately 5.5 million shares of its common stock valued at $24.7 million,newly created redeemable preferred stock (“preferred stock”) valued atapproximately $12.9 million, extinguished for cash existing debt ofapproximately $5.5 million in exchange for all of the outstanding shares ofVidus capital stock, and issued approximately 146,000 vested options with afair value of $531,000. Under the terms of the stock option grants, each optionhas been classified as a non-qualified stock option, is fully vested, has anexercise price ranging from $0.67 to $2.00 per share and has a one-year term.The Company incurred acquisition related costs of $2.6 million, of which$478,000 was allocated to the issuance of common stock. The purchase price ofapproximately $46.3 million was allocated among the tangible andidentifiable intangible assets acquired and liabilities assumed on the basis oftheir estimated fair values on the acquisition date.

Theshares of common stock issued in the acquisition were valued in accordance withEmerging Issues Task Force Issue No. 99-12, *Determinationof the Measurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination* (“EITF 99-12”). In accordance withEITF 99-12, the Company established the first date on which the number of theCompany’s shares and the amount of other consideration became fixed as ofFebruary 18, 2005. Accordingly, the Company valued the transaction using theaverage closing price of the Company’s common stock for the two-day periodending on February 18, 2005, or $4.53 per share.

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At thetime of issuance, the shares of redeemable preferred stock issued in theacquisition contained a provision whereby the redemption value may be increasedbased on the future price of the Company’s common stock (the “top-up” amount)and were recorded at fair value as required by SFAS No. 141, *Business Combinations* (“SFAS 141”)and Emerging Issues Task Force Issue No. 97-8, *Accountingfor Contingent Consideration Issued in a Purchase Business Combination*(“EITF 97-8”). The fair value of the redeemable preferred stock wasdetermined to be the aggregate of the redemption value of the preferred stockdiscounted at 6.5%, plus the estimated value of the embedded put and calloptions and the estimated top-up, discounted at the Company’s estimated cost ofequity of 14.87%. See “Note 6—Derivative Financial Instrument Liability” and“Note 7—Redeemable Preferred Stock” for further discussion of the top-up.

Thefair value of the stock options was determined using the Black-Scholes optionpricing model with the following assumptions: no dividend yield, expectedvolatility of 96%, expected life of one year and a risk-free interest rate of3.09%.

TheVidus acquisition was accounted for under SFAS No. 141, and certainspecified provisions of SFAS 142. The results of operations of Vidus areincluded in the Company’s Condensed Consolidated Statement of Operationsbeginning February 19, 2005.

Thefollowing table summarizes the estimated fair values of the tangible assetsacquired and the liabilities assumed at the date of acquisition (in thousands):
| Cash                                |   | $      | 1,269  |   |
|-------------------------------------|--------|--------|--------|--------|
| Accounts receivable                 |   | 1,669  |   |
| Prepaid expenses and  other         |   | 412    |   |
| Property and equipment              |   | 1,022  |   |
| Notes receivable from  stockholder  |   | 11     |   |
| Total tangible assets  acquired     |   | 4,383  |   |
| Accounts payable                    |   | (540   | )      |
| Accrued liabilities                 |   | (2,148 | )      |
| Deferred revenue                    |   | (4,270 | )      |
| Total tangible  liabilities assumed |   | (6,958 | )      |
| Net tangible  liabilities assumed   |   | $      | (2,575 | )      |

 

Underthe purchase method of accounting, the Company allocated the total purchaseprice to the acquired net tangible and intangible assets based upon their fairmarket value as of the date of acquisition, February 18, 2005. The intangibleassets recognized, apart from goodwill, represented contractual or other legalrights of Vidus and those intangible assets of Vidus that could be clearlyidentified. These intangible assets were identified and valued throughinterviews and analysis of data provided by Vidus concerning developmentprojects, their stage of development, the time and resources needed to completethem and, if applicable, their expected income generating ability. There wereno other contractual or other legal rights of Vidus clearly identifiable bymanagement, other than those identified below.

The allocation of the purchase price to the tangibleand identifiable intangible assets acquired and liabilities assumed was asfollows (in thousands):
| Fair value of net tangible  liabilities assumed |   | $      | (2,575 | )      |
|-------------------------------------------------|--------|--------|--------|--------|
| Intangible assets  acquired:                    |   |   |   |
| Core  developed technology                      |   | 18,410 |   |
| Order  backlog                                  |   | 5,500  |   |
| Customer  relationships                         |   | 3,660  |   |
| Trademarks                                      |   | 3,250  |   |
| Trade  names                                    |   | 2,270  |   |
|                                            |   | 33,090 |   |
|                                            |   |   |   |
| In-process research and  development            |   | 5,640  |   |
| Costs allocated to  common stock issued         |   | 478    |   |
| Deferred tax liability,  net                    |   | (3,693 | )      |
| Goodwill                                        |   | 13,341 |   |
| Purchase price                                  |   | $      | 46,281 |   |

 

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***Core Developed Technology***

Coredeveloped technology of approximately $18.4 million relates to the *Taskforce* technology. At the date ofacquisition, the developed technology was complete and had reachedtechnological feasibility. Any costs to be incurred in the future will relateto the ongoing maintenance of the developed technology and will be expensed asincurred. To estimate the fair value of the developed technology, an incomeapproach was used with a discount rate of 35%, which included an analysis offuture cash flows and the risks associated with achieving such cash flows. Thedeveloped technology is being amortized over its estimated useful life of tenyears.

***Order Backlog and Customer Relationships***

Theorder backlog of approximately $5.5 million and the customer relationships ofapproximately $3.7 million represented the fair value of the PCS obligationsand existing customer relationships. To estimate the fair value of the orderbacklog and the customer relationships, an income approach was used with adiscount rate of 30%. The order backlog and customer relationships areamortized over their estimated useful lives of three and ten years,respectively.

***Trademarks***

The*Taskforce*solution has strong namerecognition in European field service management, telecommunications, cable andutilities markets. To estimate the fair value of the trademark an incomeapproach was used with a discount rate of 40%. The Company expects to continueto produce and market the *Taskforce*product. Therefore, an analysis of various economic factors indicated theperiod of time the trademark would contribute to future cash flows. Becausecash flow is expected to continue indefinitely, the trademark is not beingamortized, but is tested for impairment at least annually and whenever eventsor changes in circumstances indicate that the carrying value may not berecoverable.

***Trade Names***

TheVidus trade name had strong name recognition in European markets. At the timeof the acquisition, the Company expected to continue to utilize the Vidus tradename in Europe. The fair value was determined using an income approach with adiscount rate of 40% and based on an analysis of various economic factors theCompany determined that the useful life of the trade name was indefinite.During the fourth quarter of 2005, management determined that the acquiredVidus trade name would no longer be utilized. As a result, the Company recordedan impairment charge of $2.3 million.

***In-Process Research and Development***

Developmentprojects that had reached technological feasibility were classified asdeveloped technology, and the value assigned to developed technology wascapitalized. In-process research and development of approximately $5.6 million reflectedresearch projects that had not reached technological feasibility or had noalternative future use at the time of the acquisition and was immediatelyexpensed. In order to achieve technological feasibility, the Company estimatedthe hours required to complete the projects would cost approximately $5.7million. The Company estimated the fair value assigned to in-process researchand development using the income approach, which discounts to present value thecash flows attributable to the technology once it had reached technologicalfeasibility using a discount rate of 40%. The stages of completion weredetermined by estimating the costs and time incurred to date relative to thecosts and time expected to be incurred to develop the in-process technologyinto a commercially viable technology or product, while considering therelative difficulty of completing the various tasks and overcoming theobstacles necessary to attain technological feasibility. The weighted averagestage of completion for all projects, in the aggregate, was approximately 80%as of the acquisition date. Cash flows from sales of products incorporatingthose technologies commenced in fiscal 2005. Expenditures to complete theacquired in-process research and development approximated the originalestimates.

***Goodwill***

Goodwillof approximately $13.3 million represents the excess of the purchase price overthe fair value of the net tangible and intangible assets acquired. Theacquisition allows the Company to integrate its technology with Vidus’technology for dynamic scheduling, dispatching, routing and appointment bookingof mobile workers, cross-sell the companies’ solutions and further develop thecombined technologies to provide customers with seamlessly integratedsolutions. The acquisition also creates the ability to expand the Company’sbusiness to Europe and other international markets. These opportunities, alongwith the ability to hire the Vidus workforce, were significant contributingfactors to the establishment of the purchase price, resulting in therecognition of a significant amount of goodwill. The goodwill and intangibleassets were allocated to the licensed reporting segment. The goodwill is notdeductible for tax purposes.

11

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TheCompany conducted its annual impairment test of its goodwill and othernon-amortizing intangible assets as of August 31, 2006 and determined there wasno impairment.

***ProForma Financial Information***

Theresults of operations of Vidus are included in the Company’s ConsolidatedStatement of Operations from the date of the acquisition. If the Company hadacquired Vidus at the beginning of the periods presented, the Company’sunaudited pro forma revenue, net loss, net loss attributable to commonstockholders and net loss per share would have been as follows (in thousands,except per share amount):
|                                                | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------|------------|
| Revenue                                        |       | $                                                        | 66,280     |   |
| Net loss                                       |       | 22,925                                                   |       |
| Net loss attributable  to common stockholders  |       | 22,551                                                   |       |
| Net loss per share                             |       |                                                     |       |
| Basic                                          |       | 0.37                                                     |       |
| Diluted                                        |       | 0.36                                                     |       |
| Shares used in  computing net income per share |       |                                                     |       |
| Basic                                          |       | 60,530                                                   |       |
| Diluted                                        |       | 61,953                                                   |       |
|                                                |            |                                                          |            |  |

 

These results are not necessarily indicative of whatthe actual results of operations would have been if the acquisition of Vidushad in fact occurred on the dates or for the periods indicated, nor do theypurport to project the results of operations for any future periods or as ofany date. These results do not give effect to any cost savings, operatingsynergies, and revenue enhancements which may result from the acquisition ofVidus or the costs of achieving these cost savings, operating synergies, andrevenue enhancements. The in-process research and development charge ofapproximately $5.6 million is included in the net loss attributable to commonstockholders for the nine months ended September 30, 2005.

***Intangible Assets***

SFAS 142 requires purchased intangible assets otherthan goodwill to be amortized over their expected useful lives unless theselives are determined to be indefinite. Purchased intangible assets are carriedat cost less accumulated amortization. Amortization is computed over theestimated useful lives of the respective assets, generally two to ten years.

Intangible assets were as follows (in thousands):
|                                 | ** ** | **As of September  30, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **Carrying  Amount**                         | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Amortized intangible  assets:   |       |                                         | ** ** |                                            |       |   |   |   |   |   |   |   |   |
| Core  developed technology      |       | $                                            | 23,462     |                                            | $          | (8,021 | ) | $ | 15,441 |   | $ | 23,462 |   | $ | (6,641 | ) | $ | 16,821 |   |
| Order  backlog                  |       | 5,500                                        | ** ** | (2,957                                          | )          | 2,543 |   | 5,500 |   | (1,582 | ) | 3,918 |   |
| Customer  relationships         |       | 3,660                                        | ** ** | (591                                            | )          | 3,069 |   | 3,660 |   | (316 | ) | 3,344 |   |
|                            |       |                                         | ** ** |                                            |       |   |   |   |   |   |   |   |   |
| Total                           |       | 32,622                                       | ** ** | (11,569                                         | )          | 21,053 |   | 32,622 |   | (8,539 | ) | 24,083 |   |
|                            |       |                                         | ** ** |                                            |       |   |   |   |   |   |   |   |   |
| Unamortized intangible  assets: |       |                                         | ** ** |                                            |       |   |   |   |   |   |   |   |   |
| Trademarks                      |       | 3,250                                        | ** ** | —                                          |       | 3,250 |   | 3,250 |   | — |   | 3,250 |   |
|                            |       |                                         | ** ** |                                            |       |   |   |   |   |   |   |   |   |
| Total intangible assets         |       | $                                            | 35,872     |                                            | $          | (11,569 | ) | $ | 24,303 |   | $ | 35,872 |   | $ | (8,539 | ) | $ | 27,333 |   |

 

During the fourth quarter of 2005, managementdetermined that Vidus Limited would officially change its name to @Road, Ltd.Therefore, the acquired Vidus trade name will no longer be utilized. The namechange is intended to leverage the @Road brand equity and more closely reflectthe Company’s objective of adding end-to-end MRM solutions offerings in Europe.As a result, the Company reduced the carrying value to zero resulting in animpairment charge of $2.3 million during the three months ended December 31,2005.

12

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Forthe three and nine months ended September 30, 2006, amortization of intangibleassets was $1.0 million and $3.0 million, respectively, compared to $1.0million and $2.5 million for the three and nine months ended September 30,2005, respectively. The estimated future amortization expense of purchasedintangible assets as of September 30, 2006 is as follows (in thousands):
| Remainder of 2006 |   | $      | 1,010  |   |
|-------------------|--------|--------|--------|--------|
| 2007              |   | 4,040  |   |
| 2008              |   | 2,458  |   |
| 2009              |   | 2,207  |   |
| 2010              |   | 2,207  |   |
| Thereafter        |   | 9,131  |   |
|              |   |   |   |
| Total             |   | $      | 21,053 |   |

 

**Note4 — Short-Term Investments**

Short-terminvestments included the following available-for-sale securities at September30, 2006 and December 31, 2005 (in thousands):
|                                 | ** ** | **As of September  30, 2006** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|
| ** **                      | ** ** | **Amortized  Cost**                          | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. Government debt securities |       | $                                            | 41,063     |   | $ | 3 |   | $ | (26 | ) | $ | 41,040 |   |
| Municipal debt securities       |       | 33,327                                       |       | — |   | — |   | 33,327 |   |
| Corporate debt securities       |       | 3,091                                        |       | — |   | — |   | 3,091 |   |
|                            |       |                                         |       |   |   |   |   |   |   |
| Total                           |       | $                                            | 77,481     |   | $ | 3 |   | $ | (26 | ) | $ | 77,458 |   |

 
|                                 | ** ** | **As of December 31, 2005** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|
| ** **                      | ** ** | **Amortized  Cost**                             | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  (Losses)** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. Government debt securities |       | $                                               | 39,276     |   | $ | — |   | $ | (72 | ) | $ | 39,204 |   |
| Municipal debt securities       |       | 36,802                                          |       | — |   | (6 | ) | 36,796 |   |
| Corporate debt securities       |       | 1,643                                           |       | — |   | — |   | 1,643 |   |
|                            |       |                                            |       |   |   |   |   |   |   |
| Total                           |       | $                                               | 77,721     |   | $ | — |   | $ | (78 | ) | $ | 77,643 |   |

 

In accordance with EITF 03-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*, the following table showsgross unrealized losses and fair value for those investments that were in anunrealized loss position as of September 30, 2006 and December 31, 2005, aggregated by investment category andthe length of time that individual securities have been in a continuous lossposition (in thousands):
|                                  | ** ** | **As of September  30, 2006** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **Less than 12 Months**       | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **Fair Value**                          | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** |
| U.S. Government debt  securities |       | $                                            | 41,040     |   | $ | (26 | ) | $ | — |   | $ | — |   | $ | 41,040 |   | $ | (26 | ) |
| Municipal debt securities        |       | 33,327                                       |       | — |   | — |   | — |   | 33,327 |   | — |   |
| Corporate debt  securities       |       | 3,091                                        |       | — |   | — |   | — |   | 3,091 |   | — |   |
|                             |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Total                            |       | $                                            | 77,458     |   | $ | (26 | ) | $ | — |   | $ | — |   | $ | 77,458 |   | $ | (26 | ) |

 
|                                  | ** ** | **As of December 31, 2005** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **Less than 12 Months**          | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **Fair Value**                             | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair Value** | ** ** | **Unrealized  Loss** | ** ** |
| U.S. Government debt  securities |       | $                                               | 39,204     |   | $ | (72 | ) | $ | — |   | $ | — |   | $ | 39,204 |   | $ | (72 | ) |
| Municipal debt  securities       |       | 36,796                                          |       | (6 | ) | — |   | — |   | 36,796 |   | (6 | ) |
| Corporate debt  securities       |       | 1,643                                           |       | — |   | — |   | — |   | 1,643 |   | — |   |
|                             |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Total                            |       | $                                               | 77,643     |   | $ | (78 | ) | $ | — |   | $ | — |   | $ | 77,643 |   | $ | (78 | ) |

 

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TheCompany reviews investments in debt securities for other than temporaryimpairment whenever the fair value of an investment is less than amortized costand evidence indicates that an investment’s carrying amount is not recoverablewithin a reasonable period of time. The decline in value of these investmentsis primarily related to changes in interest rates and is considered to betemporary in nature. When evaluating the investments, the Company considerswhether it has the ability and intent to hold the investment until a marketrecovery and considers whether evidence indicating the cost of the investmentis recoverable outweighs evidence to the contrary. Evidence considered in thisassessment includes the reasons for the impairment, compliance with theCompany’s investment policy, the severity and duration of the impairment,changes in the value subsequent to period-end and forecasted performance of theinvestee. The Company has reviewed those securities with unrealized losses asof September 30, 2006 and December 31, 2005 for other-than-temporaryimpairment, and has concluded that no other-than-temporary impairment existedas of September 30, 2006 and December 31, 2005.

**Note5 — Balance Sheet Components**

Inventoriesconsist of raw materials, work in process and finished goods, are stated at thelower of cost (average cost) or market and consist of (in thousands): 
|                 | ** ** | **As of  September 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|-----------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Raw materials   |       | $                                       | 3,189      |                                        | $          | 1,796 |   |
| Work in process |       | 9,686                                   |       | 2,013                                       |       |
| Finished goods  |       | 4,271                                   |       | 2,278                                       |       |
|            |       |                                    |       |                                        |       |
| Total           |       | $                                       | 17,146     |                                        | $          | 6,087 |   |

 

Propertyand equipment, net consist of (in thousands):
|                                           | ** ** | **As of  September 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Computers and software                    |       | $                                       | 17,113     |                                        | $          | 14,424 |   |
| Manufacturing and office equipment        |       | 1,210                                   |       | 663                                         |       |
| Furniture and fixtures                    |       | 383                                     |       | 455                                         |       |
| Leasehold improvements                    |       | 1,305                                   |       | 695                                         |       |
|                                      |       |                                    |       |                                        |       |
| Total                                     |       | 20,011                                  |       | 16,237                                      |       |
| Accumulated depreciation and amortization |       | (12,338                                 | )          | (10,042                                     | )          |
|                                      |       |                                    |       |                                        |       |
| Property and equipment, net               |       | $                                       | 7,673      |                                        | $          | 6,195 |   |

 

Accruedliabilities consist of (in thousands):
|                                           | ** ** | **As of  September 30, 2006** | ** ** | **As of  December 31, 2005** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| Accrued compensation and related benefits |       | $                                       | 4,521      |                                        | $          | 3,629 |   |
| Other accrued expenses                    |       | 4,454                                   |       | 5,122                                       |       |
| Total                                     |       | $                                       | 8,975      |                                        | $          | 8,751 |   |

 

**Note6 — Derivative Financial Instrument Liabilities**

Inconnection with the Vidus acquisition, the Company issued shares of its SeriesB-1 and B-2 redeemable preferred stock with an embedded feature indexed to theCompany’s common stock (the “top-up”) that is payable to the holders of theredeemable preferred stock upon redemption. See “Note 7 -RedeemablePreferred Stock” for further discussion. In accordance with SFAS 133, thetop-up amount is considered a derivative instrument that should be bifurcatedfrom the preferred stock host and recognized as either an asset or liability,depending on the rights and obligations under the contract, and should bemeasured at fair value. The Company accounts for changes in the fair value ofthe derivative instrument, which is not designated as a hedging instrument,through the current period earnings.

Basedon the highest ten consecutive trading days average closing price of theCompany’s common stock of $5.73 per share through September 25, 2006, per theterms of the acquisition, the final aggregate top-up amount payable uponredemption of the related preferred stock is $7.1 million. 

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The differencebetween the fair value of the derivative liability of $6.9 million and thefinal aggregate top-up amount of $7.1 million at September 30, 2006 representsthe fair value of a portion of the derivative to be recognized over the periodto the final preferred stock redemption date of February 18, 2007 for SeriesB-2 redeemable preferred stock.

Priorto the three months ended September 30, 2006, the Company used the Monte Carlosimulation of its stock price with the movements in its stock price following ageometric Brownian motion to value the derivative instrument that is recordedas a derivative liability. In valuing the embedded derivative, the Company usedthe market price of its common stock on the date of valuation, a historicalvolatility and the expected remaining period to the expiration date of thetop-up period. The Company used the following valuation assumptions:
|                                              | ** ** | **As of**    | ** ** | **As of**    | ** ** | **As of**        | ** ** | **As of**    | ** ** | **As of**    | ** ** | **As of**     | ** ** | **As of**        | ** ** |
|----------------------------------------------|------------|-------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **June 30,** | ** ** | **March 31** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **February 18,** | ** ** |
| ** **                                   | ** ** | **2006**          | ** ** | **2006**          | ** ** | **2005**              | ** ** | **2005**          | ** ** | **2005**          | ** ** | **2005**           | ** ** | **2005**              | ** ** |
| Historical volatility                        |       | 43                | %          | 47                | %          | 54                    | %          | 66                | %          | 88                | %          | 88                 | %          | 88                    | %          |
| Expected remaining  period                   |       | 3 months          |       | 6 months          |       | 9 months              |       | 12 months         |       | 15 months         |       | 15 months          |       | 15 months             |       |
| Valuation date market  price of common stock |       | $                 | 5.52       |              | $          | 5.07                  |       | $                 | 5.23       |              | $          | 4.59               |       | $                     | 2.66       |   | $ | 4.10 |   | $ | 4.50 |   |
| Risk-free interest rate                      |       | 4.95              | %          | 4.75              | %          | 4.33                  | %          | 3.97              | %          | 3.42              | %          | 3.32               | %          | 3.07                  | %          |
| Discount rate                                |       | 15.30             | %          | 15.97             | %          | 16.07                 | %          | 15.71             | %          | 15.16             | %          | 15.12              | %          | 14.87                 | %          |
|                                              |            |                   |            |                   |            |                       |            |                   |            |                   |            |                    |            |                       |            |  |  |  |  |  |  |  |

 

Thefair value of this derivative instrument was $6.9 million at September 30, 2006and was estimated at $3.9 million at June 30, 2006, $4.1 million at March 31,2006 and $2.9 million at December 31, 2005. The change in the fair value of$(3.0) million and $(4.0) million was recorded in total other (expense) income,net in the condensed consolidated statements of operations for the three and ninemonths ended September 30, 2006, respectively. The change in the fair value of$4.8 million and $772,000 was recorded in total other (expense) income, net inthe condensed consolidated statements of operations for the three and ninemonths ended September 30, 2005, respectively.

**Note7 — Redeemable Preferred Stock**

OnFebruary 18, 2005, the Board of Directors of the Company authorized thecreation of four series of preferred stock and designated approximately 44,000,44,000, 5,000 and 5,000 shares as Series A-1, A-2, B-1 and B-2 preferredstock, respectively, of which approximately 23,000, 44,000, 5,000 and 5,000shares of Series A-1, A-2, B-1 and B-2 preferred stock, respectively, wereissued and outstanding as of September 30, 2006.

***Dividends***

Theholders of the Series A-1, A-2, B-1 and B-2 preferred stock are entitledto receive dividends at the rate of $6.50 per share annually. The dividendsaccrue day to day, whether or not earned or declared, from February 18,2005. The dividends are payable when and if declared by the Board of Directorsor when shares are redeemed. Any accumulation of unpaid dividends on thepreferred stock does not bear interest. Accrued dividends totaled $813,000 asof September 30, 2006.

***Redemption***

Theholders of the Series A-1 and B-1 preferred stock may elect to redeem allor a portion of the shares at any time, and the holders of the Series A-2and B-2 preferred stock may elect to redeem all or a portion of the shares onor after February 18, 2007.

Eachshare of Series A-1 and A-2 preferred stock is redeemable for an amountequal to (i) $100 plus (ii) all declared or accumulated but unpaiddividends. Each share of Series B-1 and B-2 preferred stock is redeemablefor an amount equal to (i) $100, plus (ii) all declared oraccumulated but unpaid dividends, plus (iii) the top-up amount of $731. 

On orafter February 18, 2009, the Company may redeem all or any portion of theSeries A-1, A-2, B-1, and B-2 preferred stock.

***Conversion***

Noneof the issued series of preferred stock is convertible.

15

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***Liquidation***

Series A-1,A-2, B-1 and B-2 preferred stockholders are entitled to receive, uponliquidation, an amount equal to their respective redemption price. The holdersof the Series A-1, A-2, B-1 and B-2 preferred stock rank on a pari passubasis as to the receipt of such distributions and in preference to the holdersof common stock.

***Voting***

Each outstanding share of preferred stock is entitledto eleven (11) votes on all matters, voting with the shares of commonstock as a class.

The following table illustrates the activity for eachseries of preferred stock through September 30, 2006 (in thousands):
|                                                                             | ** ** | **Series A-1** | ** ** | **Series A-2** | ** ** | **Series B-1** | ** ** | **Series B-2** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|-----------|------------|
| Issued at fair value                                                        |       | $              | 2,352      |           | $          | 4,424          |       | $              | 3,205      |      | $          | 2,937 |   | $ | 12,918 |   |
| Reclass of bifurcated  derivative instrument, at fair value at issuance     |       | —         |       | —         |       | (2,719         | )          | (2,451         | )          | (5,170    | )          |
| Amounts accrued for  dividends for the nine months ended September 30, 2005 |       | 93             |       | 174            |       | 19             |       | 19             |       | 305       |       |
| Balance September 30,  2005 (As Restated) (See Note 1)                      |       | $              | 2,445      |           | $          | 4,598          |       | $              | 505        |      | $          | 505 |   | $ | 8,053 |   |
| Amounts accrued for  dividends for the three months ended December 31, 2005 |       | 38             |       | 75             |       | 9              |       | 9              |       | 131       |       |
| Balance December 31,  2005                                                  |       | $              | 2,483      |           | $          | 4,673          |       | $              | 514        |      | $          | 514 |   | $ | 8,184 |   |
| Amounts accrued for  dividends for the nine months ended September 30, 2006 |       | 116            |       | 215            |       | 23             |       | 23             |       | 377       |       |
| Redemption of preferred  stock                                              |       | (5             | )          | —         |       | —         |       | —         |       | (5        | )          |
| Balance September 30,  2006                                                 |       | $              | 2,594      |           | $          | 4,888          |       | $              | 537        |      | $          | 537 |   | $ | 8,556 |   |

 

**Note8 — Common Stock**

The Company’s Certificate of Incorporation, asamended, authorizes it to issue 250,000,000 shares of common stock. At September 30, 2006 and 2005 there were no sharessubject to repurchase rights.

At September 30, 2006, the Company had reserved approximately 16,373,000 shares ofcommon stock available for future issuance under its stock option plans,including approximately 10,327,000 shares related to outstanding stock options.In addition, the Company had reserved approximately 2,108,000 shares of commonstock available for future issuance under the employee stock purchase plan.

**Note9 — Employee Benefit Plans**

***Adoptionof SFAS 123R***

The Company adopted theprovisions of SFAS 123R, on January 1, 2006. Under SFAS 123R, stock-basedcompensation cost is measured at the grant date, based on the estimated fairvalue of the award at that date, and is recognized as expense over theemployee’s requisite service period (generally over the vesting period of theaward) on a straight-line basis. The Company has no awards with marketconditions. The Company has one stock option grant under which the vestingschedule will accelerate upon the achievement of certain targets during theyear ending December 31, 2006. If the performance conditions are not met during2006, the options will fully vest five years after issuance. The fair value ofthis stock option grant is based on the market price of the Company’s 

16

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stock on the grant-dateand assumes that it is not probable that the performance conditions will beachieved. Compensation cost will be adjusted for subsequent changes in theexpected outcome of performance-related conditions until the vesting date. 

TheCompany adopted the provisions of SFAS 123R using a modified-prospectiveapproach. Under the modified prospective approach, prior periods are notrevised for comparative purposes. The valuation provisions of SFAS 123R applyto new awards and to awards that are outstanding on the effective date andsubsequently modified or cancelled. Estimated compensation expense for awardsoutstanding at the effective date will be recognized on a straight-line basisover the remaining service period using the compensation cost calculated forpro forma disclosure purposes under SFAS 123 as adjusted for estimatedforfeitures. The Company has elected to follow the tax law method ofdetermining realization of excess tax benefits in accordance with SFAS 123R.

Theeffect of recording stock-based compensation for the three and nine monthsended September 30, 2006 was as follows:
|                                                                     | ** ** | **Three months  ended   September 30, 2006** | ** ** | **Nine months ended   September 30, 2006** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| Stock-based  compensation expense by type of award:                 |       |                                                        |       |                                                           |       |
| Employee  stock options                                             |       | $                                                           | 822        |                                                           | $          | 2,528 |   |
| Employee  stock purchase plan                                       |       | 219                                                         |       | 639                                                            |       |
| Amounts  capitalized as inventory                                   |       | (2                                                          | )          | (4                                                             | )          |
| Total stock-based  compensation                                     |       | $                                                           | 1,039      |                                                           | $          | 3,163 |   |
|                                                                |       |                                                        |       |                                                           |       |
| Tax effect on  stock-based compensation                             |       | $                                                           | 136        |                                                           | $          | 606 |   |
| Net effect on net (loss) income attributable to common stockholders |       | $                                                           | 903        |                                                           | $          | 2,557 |   |
|                                                                |       |                                                        |       |                                                           |       |
| Effect on (loss) income  per share:                                 |       |                                                        |       |                                                           |       |
| Basic                                                               |       | $                                                           | 0.01       |                                                           | $          | 0.04 |   |
| Diluted                                                             |       | $                                                           | 0.01       |                                                           | $          | 0.04 |   |

 

TheCompany recorded $1.0 million of stock-based compensation expense in itscondensed consolidated statement of operations for the three months endedSeptember 30, 2006. A total of $562,000 of this expense relates to prior yearawards vesting after January 1, 2006 and $477,000 relates to options grantedafter the adoption of SFAS 123R. For the nine months ended September 30, 2006,the Company recorded $3.2 million of stock-based compensation expense in itscondensed consolidated statement of operations of which $2.4 million relates toprior year awards vesting after January 1, 2006 and $727,000 relates to optionsgranted after the adoption of SFAS 123R.

As ofSeptember 30, 2006, there were $5.3 million of total unrecognized compensationcost related to non-vested stock-based employee compensation arrangements. Thecost is expected to be recognized over a weighted-average period of 2.6 years. Forthe three and nine months ended September 30, 2006, stock-based compensationtotaling $2,000 and $4,000, respectively, was capitalized as inventory.

***Valuation Assumptions***

Theweighted-average estimated fair value of employee stock options granted duringthe three months ended September 30, 2006 and 2005 was $2.71 and $1.69 pershare, respectively. The weighted-average estimated fair value of employeestock options granted during the nine months ended September 30, 2006 and 2005was $2.86 and $2.26 per share, respectively. The Company calculated the fairvalue of each option award on the date of grant using the Black-Scholes optionpricing model with the following weighted-average assumptions (annualizedpercentages):
|                          | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| **Stock option plans:**  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Volatility               |       | 68                               | %          | 77                              | %          | 68 | % | 106 | % |
| Risk-free interest rate  |       | 4.8                              | %          | 4.1                             | %          | 4.8 | % | 3.4 | % |
| Dividend yield           |       | 0.0                              | %          | 0.0                             | %          | 0.0 | % | 0.0 | % |
| Expected life (in years) |       | 5.0                              |       | 2.5                             |       | 5.0 |   | 5.0 |   |
| Forfeiture rate          |       | 27                               | %          | 0                               | %          | 27 | % | 0 | % |

 

17

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|                                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September 30,  2006**          | ** ** | **September 30,  2005**         | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| **Employee stock purchase plans:** | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Volatility                         |       | 57                               | %          | 57                              | %          | 72 | % | 67 | % |
| Risk-free interest rate            |       | 5.0                              | %          | 3.1                             | %          | 4.7 | % | 1.1 | % |
| Dividend yield                     |       | 0.0                              | %          | 0.0                             | %          | 0.0 | % | 0.0 | % |
| Expected life (in years)           |       | 1.2                              |       | 0.5                             |       | 1.1 |   | 0.5 |   |

 

Expectedvolatility is determined using a 50% weighting to both historical volatility ofthe Company’s common stock over a period of 4.5 to 5.0 years following theCompany’s initial public offering and implied volatility based on the Company’straded stock options. The risk-free interest rate is calculated using zerocoupon rates on treasury notes stripped principal for each grant date given theexpected life. The dividend yield of zero is based on the fact that the Companyexpects to invest cash in operations and has never paid cash dividends oncommon stock. The expected life is calculated for the period from the Company’sinitial public offering using the interval between the grant date and theexercise date weighted by the number of shares exercised. The expected life isadjusted for the anticipated behavior in relation to unexercised options.

Asstock-based compensation expense recognized in the statements of operations for2006 is based on awards ultimately expected to vest, it is reduced forestimated forfeitures. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Pre-vesting forfeitures were estimatedto be approximately 27% as of September 30, 2006 based on weighted averagehistorical forfeiture rates. Under the provisions of SFAS 123R, theCompany will record additional expense if the actual forfeiture rate is lowerthan estimated, and will record a recovery of prior expense if the actualforfeiture rate is higher than estimated. In the Company’s pro forma informationrequired under SFAS 123 for the periods prior to fiscal 2006, the Companyaccounted for forfeitures as they occurred.

***Pro FormaInformation under FAS 123 for Periods Prior to Fiscal 2006***

Prior to adopting the provisions of SFAS 123R, theCompany provided the disclosures required under SFAS 123 as amended byStatement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation*–*Transition and Disclosures* (“SFAS 148”).

For purposes of pro forma disclosures under SFAS 123for the three and nine months ended September 30, 2005, the estimated fairvalue of the stock options was assumed to be amortized to expense over thestock options’ vesting periods. The pro forma effects of recognizing estimatedcompensation expense under the fair value method on net loss and loss percommon share for the three and nine months ended September 30, 2005 were asfollows:
|                                                                                                               | ** ** | **Three Months Ended**                                 | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                    | ** ** | **   September  30, 2005   ** | ** ** | **September 30, 2005**     | ** ** |
| Net income as reported                                                                                        |       | $                                                                | 37,998     |                            | $          | 25,610 |   |
| Add: stock-based  employee compensation expense included in reported net loss, net of tax  effect             |       | —                                                           |       | —                          |       |
| Less: stock-based  employee compensation expense determined under fair value based method, net  of tax effect |       | (441                                                             | )          | (4,038                          | )          |
|                                                                                                          |       |                                                             |       |                            |       |
| Pro forma net income                                                                                          |       | 37,557                                                           |       | 21,572                          |       |
| Preferred stock  dividends                                                                                    |       | (124                                                             | )          | (305                            | )          |
|                                                                                                          |       |                                                             |       |                            |       |
| Pro forma net income  attributable to common stockholders                                                     |       | $                                                                | 37,433     |                            | $          | 21,267 |   |
|                                                                                                          |       |                                                             |       |                            |       |
| Basic net income per  share:                                                                                  |       |                                                             |       |                            |       |
| As  reported                                                                                                  |       | $                                                                | 0.62       |                            | $          | 0.42 |   |
|                                                                                                          |       |                                                             |       |                            |       |
| Pro  forma                                                                                                    |       | $                                                                | 0.62       |                            | $          | 0.36 |   |
|                                                                                                          |       |                                                             |       |                            |       |
| Diluted net income per  share:                                                                                |       |                                                             |       |                            |       |
| As  reported                                                                                                  |       | $                                                                | 0.61       |                            | $          | 0.41 |   |
|                                                                                                          |       |                                                             |       |                            |       |
| Pro  forma                                                                                                    |       | $                                                                | 0.60       |                            | $          | 0.35 |   |

 

18

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***Equity Incentive Plans***

The Company has equityincentive plans for directors, officers and employees. Stock options grantedunder these plans generally vest 25% one year from the date of grant and theremainder vest at a rate of 2.08% per month thereafter. Grants to existingemployees generally vest 25% per year on the anniversary of the grant.Non-employee directors upon becoming a director receive an initial grant ofoptions to purchase 40,000 shares vesting over 4 years and annual grantsof options to purchase 10,000 shares vesting over one year. Options generallyexpire 10 years from the date of grant. The Company’s equity incentiveplans contain a provision that automatically increases through 2010, on eachJanuary 1, the number of shares reserved for issuance under these plans bythe lesser of 2,500,000 shares or four percent of the total shares outstandingon the last day of the preceding year.

The following tablesummarizes activity under the Company’s equity incentive plans for the ninemonths ended September 30, 2006 (in thousands, except per share amounts):
|                                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2006                    |       | 9,571                      |       | $                                      | 4.81       |                                                             |       |                            |       |   |
| Granted                                            |       | 1,714                      |       | 4.76                                   |       |                                                             |       |                            |       |
| Exercised                                          |       | (292                       | )          | 2.60                                   |       |                                                             |       |                            |       |
| Canceled                                           |       | (666                       | )          | 5.70                                   |       |                                                             |       |                            |       |
| Outstanding at  September 30, 2006                 |       | 10,327                     |       | $                                      | 4.81       |                                                             | 7.0        |                            | $          | 18,019 |   |
| Vested and  expected to vest at September 30, 2006 |       | 10,215                     |       | $                                      | 4.91       |                                                             | 7.0        |                            | $          | 17,794 |   |
| Options exercisable at  September 30, 2006         |       | 6,273                      |       | $                                      | 5.22       |                                                             | 5.8        |                            | $          | 11,226 |   |

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of theunderlying awards and the quoted price of the Company’s common stock for the 8.3million options that were in-the-money at September 30, 2006. As of September30, 2006, the closing price of the Company’s common stock was $5.84 per share.In-the-money options are options with an exercise price lower than the $5.84closing price. Out-of-the-money options are options with an exercise pricegreater than the $5.84 closing price. The total intrinsic values of optionsexercised during the three and nine months ended September 30, 2006 was$150,000 and $747,000 respectively, compared to $86,000 and $360,000,respectively, for the same periods in 2005. The intrinsic value is determinedas of the date of option exercise. The total cash received from employees as aresult of employee stock option exercises during the three months endedSeptember 30, 2006 and 2005 was approximately $193,000 and $103,000,respectively. The total cash received from employees as a result of employeestock option exercises during the nine months ended September 30, 2006 and 2005was approximately $763,000 and $383,000, respectively.

Additional informationregarding options outstanding as of September 30, 2006 is as follows (shares inthousands):
|                         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                     | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Number**                   | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $                  | 0.07       | –                       |  1.63 |                                                             | 714        |   | 3.7 |   | $ | 1.20 |   | 714 |   | $ | 1.20 |   |
|                    | 1.97       | –                       |  2.00 |                                                             | 824        |   | 4.9 |   | 2.00 |   | 824 |   | 2.00 |   |
|                    | 2.07       | –                       |  3.40 |                                                             | 1,155      |   | 8.2 |   | 2.93 |   | 479 |   | 2.86 |   |
|                    | 3.47       | –                       |  3.69 |                                                             | 1,224      |   | 6.9 |   | 3.57 |   | 725 |   | 3.61 |   |
|                    | 3.85       | –                       |  4.18 |                                                             | 1,247      |   | 8.2 |   | 4.00 |   | 392 |   | 4.04 |   |
|                    | 4.21       | –                       |  4.40 |                                                             | 1,050      |   | 9.8 |   | 4.39 |   | 63 |   | 4.32 |   |
|                    | 4.48       | –                       |  5.05 |                                                             | 1,261      |   | 6.8 |   | 4.87 |   | 914 |   | 4.96 |   |
|                    | 5.14       | –                       |  6.38 |                                                             | 923        |   | 8.3 |   | 5.50 |   | 233 |   | 5.54 |   |
|                    | 6.40       | –                       |  9.00 |                                                             | 936        |   | 5.6 |   | 7.69 |   | 936 |   | 7.69 |   |
|                    | 9.90       | –                       | 14.58      |                                                             | 993        |   | 6.0 |   | 11.48 |   | 993 |   | 11.48 |   |
|                    |       | 10,327                       |       | 7.0                                                              |       | $ | 4.81 |   | 6,273 |   | $ | 5.22 |   |

 

19

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|                           | ** ** | **Options Exercisable** | ** ** | **Options Unexercisable**         | ** ** | ** **

**Total Options** | ** ** |
|---------------------------|------------|------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **Number  of  Shares**       | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Shares**             | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| In-the-money              |       | 4,292                        |       | $                                      | 3.22       |                               | 3,973      |   | $ | 4.13 |   | 8,265 |   | $ | 3.66 |   |
| Out-of-the-money          |       | 1,981                        |       | 9.55                                   |       | 81                                 |       | 6.17 |   | 2,062 |   | 9.41 |   |
| Total options outstanding |       | 6,273                        |       | $                                      | 5.22       |                               | 4,054      |   | $ | 4.17 |   | 10,327 |   | $ | 4.81 |   |

 

The Company settlesemployee stock option exercises with newly issued common shares.

***Employee Stock Purchase Plan***

The Company has anemployee stock purchase plan for all eligible employees. This plan isconsidered compensatory under SFAS 123R. Under the plan, shares of its commonstock may be purchased over an offering period with a maximum duration of twoyears at 85% of the lower of the fair market value on the first day of theapplicable offering period or on the last day of the six-month purchase period.Employees may purchase up to 1,800 shares having a value not exceeding 20% oftheir gross compensation during an offering period. During the nine monthsended September 30, 2006, employees purchased approximately 314,000 shares atan average price of $3.02 per share. During the nine months ended September 30, 2005, employees purchasedapproximately 295,000 shares at an average price of $2.88 per share. AtSeptember 30, 2006, approximately 2,108,000 shares of common stock werereserved for future issuance. The Company’s employee stock purchase plancontains a provision that automatically increases, on each January 1, thenumber of shares reserved for issuance under the employee stock purchase planby the lesser of 900,000 or two percent of the total shares outstanding on thelast day of the preceding year.

***Receivable from Sales of Stock***

As a result of the Vidusacquisition, the Company has one note receivable outstanding from an employeethat is secured by common stock. The note receivable totals $4,000 at September30, 2006, which will be fully paid by 2007.

***401(k) Saving and Retirement Plan***

The Company sponsors a401(k) Saving and Retirement Plan (“Plan”) for all employees who meetcertain eligibility requirements. Participants may contribute, on a pre-taxbasis, between 1 percent and 75 percent of their annual compensation,but not to exceed a maximum contribution amount pursuant toSection 401(k) of the Internal Revenue Code. The Company is notrequired to contribute, nor has it contributed, to the Plan for any of the periodspresented.

**Note 10 — SegmentReporting**

Reportable segments arebased upon the Company’s internal organization structure, the manner in whichthe operations are managed, the criteria used by the Company’s chief operatingdecision-maker to evaluate segment performance, the availability of separatefinancial information. The Company’s chief operating decision-maker is itsChief Executive Officer.

Effective with theacquisition of Vidus, the Company reports the results of its operations in twosegments: Hosted and Licensed. The segments are managed separately because eachoffers different products and serves different markets. The Hosted segmentprovides field force management (“FFM”) and field asset management (“FAM”)solutions that connect mobile workers in the field to corporate data on demand,help measure overall mobile workforce performance and manage mobile assets. TheLicensed segment provides customers with the Company’s field service management (“FSM”)*Taskforce* solution which is designed to enable apredictable and reliable customer experience from commitment to servicefulfillment; and to help synchronize call center and field service operation.

The financial informationused by the Company’s chief operating decision-maker includes net revenue from externalcustomers, gross margins and net loss for each of these segments.

20

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Information about operations by reporting segment isas follows (in thousands):
| ** **                                 | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **Hosted**                                               | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
| Net revenues from  external customers      |       | $                                                        | 21,275     |   | $ | 3,880 |   | $ | 25,155 |   | $ | 18,965 |   | $ | 6,004 |   | $ | 24,969 |   |
| Cost of revenues                           |       | 11,370                                                   |       | 1,204 |   | 12,574 |   | 10,238 |   | 1,481 |   | 11,719 |   |
| Intangibles  amortization                  |       | —                                                   |       | 1,010 |   | 1,010 |   | — |   | 1,010 |   | 1,010 |   |
|                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin                               |       | $                                                        | 9,905      |   | $ | 1,666 |   | $ | 11,571 |   | $ | 8,727 |   | $ | 3,513 |   | $ | 12,240 |   |
|                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin percentage                    |       | 47                                                       | %          | 43 | % | 46 | % | 46 | % | 59 | % | 49 | % |
|                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income  before income taxes     |       | $                                                        | (2,334     | ) | $ | (1,300 | ) | $ | (3,634 | ) | $ | 4,277 |   | $ | (101 | ) | $ | 4,176 |   |
| (Provision for) benefit  from income taxes |       | (437                                                     | )          | 601 |   | 164 |   | 34,593 |   | (771 | ) | 33,822 |   |
|                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                          |       | $                                                        | (2,771     | ) | $ | (699 | ) | $ | (3,470 | ) | $ | 38,870 |   | $ | (872 | ) | $ | 37,998 |   |
|                                       |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                               |       | $                                                        | 665        |   | $ | 161 |   | $ | 826 |   | $ | 503 |   | $ | 192 |   | $ | 695 |   |

 
| ** **                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **Hosted**                                              | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** | **Hosted** | ** ** | **Licensed** | ** ** | **Consolidated** | ** ** |
| Net revenue from  external customers       |       | $                                                       | 61,880     |   | $ | 11,221 |   | $ | 73,101 |   | $ | 58,140 |   | $ | 7,447 |   | $ | 65,587 |   |
| Cost of revenue                            |       | 33,661                                                  |       | 3,617 |   | 37,278 |   | 28,989 |   | 3,654 |   | 32,643 |   |
| Intangibles  amortization                  |       | —                                                  |       | 3,030 |   | 3,030 |   | — |   | 2,477 |   | 2,477 |   |
|                                       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin                               |       | $                                                       | 28,219     |   | $ | 4,574 |   | $ | 32,793 |   | $ | 29,151 |   | $ | 1,316 |   | $ | 30,467 |   |
|                                       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Gross margin percentage                    |       | 46                                                      | %          | 41 | % | 45 | % | 50 | % | 18 | % | 46 | % |
|                                       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income  before income taxes     |       | $                                                       | (3,926     | ) | $ | (6,684 | ) | $ | (10,610 | ) | $ | 2,473 |   | $ | (13,880 | ) | $ | (11,407 | ) |
| (Provision for) benefit  from income taxes |       | (1,608                                                  | )          | 2,506 |   | 898 |   | 34,593 |   | 2,424 |   | 37,017 |   |
|                                       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) income                          |       | $                                                       | (5,534     | ) | $ | (4,178 | ) | $ | (9,712 | ) | $ | 37,066 |   | $ | (11,456 | ) | $ | 25,610 |   |
|                                       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                               |       | $                                                       | 1,907      |   | $ | 530 |   | $ | 2,437 |   | $ | 1,446 |   | $ | 397 |   | $ | 1,843 |   |

 

Revenues are attributedto countries based on the location of the customer.  The distribution ofrevenue by geographic area was summarized as follows (in thousands):
|                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                        | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue  from Unaffiliated Customers:** | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| United  States and Canada                 |       | $                                               | 21,275     |                                           | $          | 19,240 |   | $ | 61,931 |   | $ | 58,415 |   |
| Europe                                    |       | 3,880                                           |       | 5,729                                          |       | 11,170 |   | 7,172 |   |
|                                      |       | $                                               | 25,155     |                                           | $          | 24,969 |   | $ | 73,101 |   | $ | 65,587 |   |

 

21

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Long-lived assets are allocated among geographiesbased upon the country in which the long-lived asset is located or owned.

The distribution of long-lived assets by geographicarea was summarized as follows (in thousands):
|                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Long-Lived Assets, Net:** | ** ** | ** **        | ** ** | ** **            | ** ** |
| United  States              |       | $                 | 6,215      |                  | $          | 5,184 |   |
| United  Kingdom             |       | 38,444            |       | 41,773                |       |
| India                       |       | 1,395             |       | 312                   |       |
|                        |       |              |       |                  |       |
|                        |       | $                 | 46,054     |                  | $          | 47,269 |   |

 

**Note 11 — Commitments andContingencies**

***Lease Commitments***

The following tablerepresents the future minimum lease payments under non-cancelable operating andcapital leases as of September 30, 2006 (in thousands).
| Remainder of 2006             |   | $     | 512    |   |
|-------------------------------|--------|-------|--------|--------|
| 2007                          |   | 2,006 |   |
| 2008                          |   | 1,798 |   |
| 2009                          |   | 1,747 |   |
| 2010                          |   | 1,044 |   |
| Thereafter                    |   | 634   |   |
| Total minimum lease  payments |   | $     | 7,741  |   |

 

The Company recognizesrent expense on a straight-line basis over the lease period and has accrued forrent expense incurred but not paid. Rent expense was approximately $540,000 and$598,000 for the three months ended September 30, 2006 and 2005, respectively,and approximately $1.6 million and $1.9 million for the nine months endedSeptember 30, 2006 and 2005, respectively.

The Company has futureminimum lease payments for capital and financing leases for office equipmentand furniture in the amount of $54,000 included in the table above.

On February 1, 2006,the Company entered into a lease for its future research and development andcustomer service center from February 2006 through January 2009,occupying 37,910 square feet in Chennai India. The total minimum future leasepayments are included in the table above.

***Purchase Commitments***

At September 30, 2006,the Company had non-cancelable inventory purchase commitments totalingapproximately $2.8 million and other purchase obligations totalingapproximately $4.9 million.

***Legal Proceedings***

From time to time, theCompany is subject to claims in legal proceedings arising in the normal courseof business. Based on an evaluation of these matters, the Company believes thatthese matters will not have a material effect on the results of operations orfinancial position of the Company.

***Other Contingencies***

The Company from time totime enters into certain types of agreements that contingently require it toindemnify parties against third party claims. These agreements primarily relateto: (i) certain agreements with the Company’s officers, directors andemployees and third parties, under which the Company may be required toindemnify such persons for liabilities arising out of their duties to theCompany and (ii) certain agreements under which the Company indemnifiescustomers and other third parties for claims such as those arising fromintellectual property infringement, personal injury, or non-performance underthe agreement. Certain of the Company’s

22

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strategic alliance agreements include liquidateddamages in relation to a change in control.  Such indemnification and liquidated damages provisions areaccounted for in accordance with SFAS No. 5,*Accounting for Contingencies*. To date, the Company has notincurred any costs related to any claims under such indemnification or liquidated damages provisions.

In general, the Companyprovides its customers a 12-month limited warranty that the hardware furnishedunder the hosted agreements will be free from defects in materials andworkmanship and will substantially conform to the specifications for suchhardware. The Company’s policy is to expense such costs as incurred. To date,the Company has incurred minimal costs related to this limited warrantyobligation. The Company also provides its European customers with the longer ofthe European Union statutory warranty of 90 days or country specific warrantyof up to 365 days. If the warranty is invoked, the Company may be required tocorrect errors in its software rather than refund any fees under thearrangement. As of September 30, 2006, this warranty has not been invoked byany of the Company’s customers.

**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

The following discussionshould be read in conjunction with the condensed consolidated financialstatements and the related notes included in this Quarterly Report on Form10-Q, our Quarterly Report on Form 10-Q for the three months ended June 30,2006, our Quarterly Report on Form 10-Q/A for the three months ended March 31,2006, our Annual Report on Form 10-K/A for the year ended December 31, 2005 andin our other filings with the SEC. Except for the historical informationcontained herein, the matters discussed in this Quarterly Report on Form 10-Qare forward-looking statements involving risks and uncertainties that couldcause actual results to differ materially from those in such forward-lookingstatements. Numerous factors, risks and uncertainties affect our operatingresults and could cause our actual results to differ materially from forecastsand estimates or from any other forward-looking statements made by us or on ourbehalf and there can be no assurance that future results will meetexpectations, estimates or projections. Further information regarding these andother risks is included in this Quarterly Report on Form 10-Q under the sectionbelow entitled “Factors that Could Affect Future Results,” elsewhere in thisQuarterly Report on form 10-Q and in our other filings with the SEC.

**Overview**

We area leading provider of mobile resource management (“MRM”) solutions, a categoryof business productivity solutions designed to enable the effective managementof mobile resources. Our MRM solutions allow customers to improve productivityby enabling the effective management of the activities of their mobile workers,assets, goods and services. Currently, we market and sell our solutions to arange of customers in North America, Europe and Australia. We offer Field ForceManagement (“FFM”) solutions, including our GeoManagerSM, PathwaySM and PorticoSM solutions, designed to help companies bettermanage their mobile workers; Field Service Management (“FSM”) solutions, suchas our TaskforceTM software, designed to help companies bettermanage their mobile workers’ work; and Field Asset Management (“FAM”)solutions, such as vehicle diagnostics and status sensors, designed to help companiesbetter manage their mobile workers’ assets in the field. At September 30, 2006,approximately 193,000 mobile resources were enabled with our solutions, oneither a subscription or a per seat license basis.

We report the results ofour operations in two segments: Hosted and Licensed. The segments are managedseparately because each offers different products and serves different segmentsof the market. The Hosted segment provides the FFM and FAM solutions that connectmobile workers in the field to corporate data on demand, help measure overallmobile workforce performance and manage mobile assets. The Licensed segmentprovides customers with our FSM solution, which is designed to enable apredictable and reliable customer experience from commitment to servicefulfillment; and to help synchronize the call center and field serviceoperations.

Subsequent to December31, 2005, we determined that our condensed consolidated financial statementscontained errors resulting from the improper accounting for the common andredeemable preferred stock issued in connection with the Vidus acquisition. Wealso identified an error in the benefit for income taxes. Accordingly, theunaudited quarterly financial data for the three and nine months ended September30, 2005 presented herein has been restated. The impact on our condensedconsolidated statements of operations for the three and nine months ended September30, 2005 was an increase in net loss of $4.5 million and $402,000, respectively.

The accompanyingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations gives effect to this restatement as described in “Note 1 —Summary of Significant Accounting Policies, Restatement of FinancialStatements” to the condensed consolidated financial statements.

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**CriticalAccounting Policies, Judgments and Estimates**

***General***

The accompanyingdiscussion and analysis of our financial condition and results of operationsare based on our condensed consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. We believe there are several accounting policies thatare critical to understanding our condensed consolidated financial statementsas these policies affect the reported amounts of revenue and expenses andinvolve management’s judgment regarding significant estimates. We have basedour estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Our seniormanagement has reviewed our critical accounting policies and their applicationin the preparation of our financial statements and related disclosures anddiscussed the development, selection and disclosure of significant estimateswith the Audit Committee of our Board of Directors. To the extent that actual resultsdiffer from those estimates, our future results of operations may be affected.

***Revenue Recognition***

We follow specific anddetailed guidelines in recognizing revenue in accordance with the provisions ofAICPA Statement of Position 97-2, *SoftwareRevenue Recognition*, as amended by Statement of Position 98-4, *Deferral of the Effective Date of a Provision of SOP97-2*and Statement of Position 98-9, *Modification of SOP 97-2, Software Revenue Recognition, With Respect toCertain Transactions*, as well as Accounting Research Bulletin No.45, *Long-Term Construction-Type Contracts*andStatement of Position 81-1*, Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.*Werecognize revenue when the price is fixed and determinable, persuasive evidenceof an agreement exists, our obligations under any such agreement are fulfilledand collectibility is probable.

Our revenues arecomprised of hosted revenue and licensed revenue. Hosted revenue is derivedfrom monthly fees for our FFM and FAM solutions and monthly or upfront fees forin-vehicle hardware devices enabling a mobile resource to utilize these FFM orFAM solutions. Licensed revenue is comprised of license fees, installation,training and related post-contract customer support (“PCS”) service feesrelating to our FSM solution.

Monthly fees for ourhosted solutions are recognized ratably over the contract period, whichcommences (a) upon installation of our proprietary hardware devices in ourcustomer’s mobile worker vehicles or (b) upon the creation of subscriptionlicenses and a customer account on our website where customers have elected touse our solution with a mobile telephone. Upfront fees for our hosted solutionprimarily consist of amounts for the in-vehicle enabling hardware device andperipherals, if any. We defer upfront fees at installation and recognize themratably over the minimum service contract period, generally one to five years.Product costs are also deferred and amortized over such period. Renewal ratesfor our hosted solutions are not considered priced at a bargain in comparisonto the upfront fees (as described in Staff Accounting Bulletin No. 104, *Revenue Recognition*). If we cannotobjectively determine the fair value of any undelivered element included in hostedarrangements, we defer revenue until all elements are delivered, all serviceshave been performed or fair value can objectively be determined.

Licensed revenueassociated with the fees for the license of our Taskforce product and relatedcustomization and installation services is generally recognized using thepercentage-of-completion method of accounting over the period that services areperformed. For agreements accounted for under the percentage-of-completionmethod, we determine progress to completion based on actual direct labor hoursincurred to date as a percentage of the estimated total direct labor hoursrequired to complete the project. We periodically evaluate the actual status ofeach project to ensure that the estimates to complete each contract remainaccurate. A provision for estimated losses on contracts is made in the periodin which the loss becomes probable and can be reasonably estimated. To date, wehave not incurred any such losses.

If the amount of licensedrevenue recognized under the percentage of completion method exceeds the amountbilled to customers, the excess amount is recorded as unbilled accountsreceivable. If the amount billed exceeds the amount of revenue recognized, theexcess amount is recorded as customer deposits.

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Revenue recognized in any period is dependent on ourprogress toward completion of projects in progress. For projects that were inprogress and not complete as of September 30, 2006 and 2005, the followingtable illustrates the total direct labor hours incurred as a percentage ofestimated total direct labor hours required to complete these projects.
|                                                                                                                        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **  2006  **               | ** ** | **  2005  ** | ** ** |
| Total direct labor  hours incurred to date as a % of estimated total direct labor hours required  to complete projects |       | 85                                             | %          | — | % |

 

Significant managementjudgment and discretion are used to estimate total direct labor hours. Anychanges in or deviations from these estimates could have a material effect onthe amount of revenue we recognize in any period. Based on our results for thethree and nine months ended September 30, 2006, a ten percent deviation fromour estimated total direct labor hours required to complete projectsuncompleted at September 30, 2006 would have resulted in an insignificantincrease or decrease in net loss attributable to common stockholders.

We derive PCS fees fromPCS agreements, which are generally initially purchased at the same time as alicense for our Taskforce product. PCS can include telephone and email supportand the right to receive unspecified upgrades on a when-and-if-available basis.PCS agreements may generally be renewed on an annual basis. We recognizerevenue for PCS based on vendor specific objective evidence (“VSOE”) of fairvalue ratably over the term of the PCS period. We generally determine VSOE ofPCS based on the stated fees for PCS renewal set forth in the original licenseagreement. If we are unable to establish VSOE of fair value, we recognize theentire arrangement fee ratably over the term of the PCS, when the only remainingundelivered element is PCS.

For arrangements withmultiple elements, such as licenses, customization services and PCS services,we allocate revenue to each element based upon its fair value as determined byVSOE. VSOE for each element is based on normal pricing and discountingpractices when the element is sold separately. VSOE for PCS services ismeasured by the stated renewal rate. If we cannot objectively determine thefair value of any undelivered element included in license arrangements, wedefer revenue until the earliest to occur of the following: (a) all elementsare delivered, (b) all services have been performed or only PCS services remainto be delivered, or (c) fair value can objectively be determined. When the fairvalue of a delivered element has not been established, we use the residualmethod to record license revenue if the fair value of all undelivered elementsis determinable. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the fee is allocated to thedelivered elements and is recognized as revenue assuming all other criteriahave been met.

***Pursuant to Emerging Issues Taskforce Issue 06-3,***How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (“EITF 06-3”), we elected topresent taxes collected from customers and remitted to governmental authoritiesnet in our financial statements consistent with our historical presentation ofthis information.

***Stock-based Compensation***

We adopted the provisionsof Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised), *Share-Based Payment* (“SFAS 123R”), onJanuary 1, 2006. During the three and nine months ended September 30, 2006, werecorded stock-based compensation expense of $1.0 million and $3.2 million,respectively, in accordance with SFAS 123R. The current period stock-basedcompensation recognized is based on the amortization of the fair value of stockoptions as determined on their date of grant using a Black-Scholes optionvaluation model. The estimate of fair value under the Black-Scholes optionvaluation model is based upon certain assumptions including stock pricevolatility, risk-free interest rate, dividend yield, expected life in years andforfeiture rate.

Expectedvolatility for the three and nine months ended September 30, 2006 of 68% isdetermined using a 50% weighting for both historical volatility of our commonstock over a period of 4.5 to 5.0 years following our initial public offeringand implied volatility based on our traded stock options. If our stock pricevolatility were to change by 10%, the weighted average estimated fair value ofstock options granted during both the three and nine months ended September 30,2006 would change by 6%.

The expectedlife for both the three and nine months ended September 30, 2006 of 5.0 years iscalculated for the period from our initial public offering using the intervalbetween the grant date and the exercise date weighted by the number of sharesexercised. The expected life is adjusted for the anticipated behavior inrelation to unexercised options. If the expected life were to change by 10%,the weighted average estimated fair value of stock options granted during both thethree and nine months ended September 30, 2006 would change by 4%.

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We are required to estimate the expected forfeiturerate and only recognize expense for those shares expected to vest. The forfeiturerate for both the three and nine months ended September 30, 2006 was 27%,calculated based on a weighted average historical forfeiture rate. If theactual forfeiture rate is higher than the original estimate, we will record arecovery of prior expense. If the actual forfeiture rate is lower than theoriginal estimate, we will record additional expense.

The Companyhas elected to follow the tax law method of determining realization of excesstax benefits in accordance with SFAS 123R.

Theseassumptions represent management’s best estimates, but these estimates involveinherent uncertainties and the application of management judgment. As a result,if other assumptions had been used, our recorded and pro forma stock-basedcompensation expense could have been materially different from that depicted above.

***Valuation of Intangible Assets and Goodwill***

Inaccordance with the provisions of SFAS No. 141, *Business Combinations*(“SFAS 141”), the purchase price of anacquired company is allocated between intangible assets and the net tangibleassets of the acquired business with the residual of the purchase pricerecorded as goodwill. The determination of the value of the intangible assetsacquired and their expected lives involves certain judgments and estimates.These judgments can include, but are not limited to, the cash flows that anasset is expected to generate in the future and the appropriate weightedaverage cost of capital.

AtSeptember 30, 2006, our goodwill totaled $13.3 million and our identifiableintangible assets totaled $24.3 million. In accordance with the provisions ofSFAS 142, *Goodwill and Other IntangibleAssets*, we assess the impairment of goodwill and indefinite livedidentifiable intangible assets of our reporting units at least annually, ormore often if events or changes in circumstances indicate that the carryingvalue may not be recoverable. This assessment is based upon a discounted cashflow analysis and analysis of our market capitalization. The estimate of cashflow is based upon, among other things, certain assumptions about expectedfuture operating performance and an appropriate discount rate determined by ourmanagement. Our estimates of discounted cash flows may differ from actual cashflows due to, among other things, economic conditions, changes to the businessmodel or changes in operating performance.

Significantdifferences between these estimates and actual cash flows could materiallyaffect our future financial results. We conducted our annual impairment test ofour goodwill and other non-amortizing intangible assets as of August 31, 2006and determined there was no impairment. During the fourth quarter of 2005, wedetermined that the acquired Vidus trade name was impaired and as a result,reduced the carrying value of the trade name to zero. There were no events orcircumstances during the three and nine months ended September 30, 2006indicating that a further assessment was necessary.

***Allowance for Doubtful Accounts***

Historically,we have had a significant number of small- to medium-sized companies utilizingour solutions. These customers are involved in diverse businesses. Our paymentarrangements with customers generally provide 30 to 45 day payment terms. Whencustomers contract with us, we assess their creditworthiness.

Thenature of our relationship with customers is inherently long-term and we haveextended and may extend payment terms on an exception basis. We regularlyreview our customers’ ability to satisfy their payment obligations and providean allowance for doubtful accounts for specific receivables that we believe arenot collectible. When these conditions arise, we suspend recognition of revenueuntil collection becomes probable or cash is collected. Beyond these specificcustomer accounts, we record an allowance based on the size and age of allreceivable balances against which we have not established a specific allowance,current economic trends and historical experience with collections. Thefollowing table illustrates the allowance for doubtful accounts as a percentageof gross accounts receivable as of September 30, 2006 and December 31, 2005:
|                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Gross accounts  receivable                                           |       | $                      | 17,089     |                  | $          | 12,851 |   |
| Allowance for doubtful  accounts                                     |       | $                      | 139        |                  | $          | 376 |   |
| Allowance for doubtful  accounts as a % of gross accounts receivable |       | 0.8                    | %          | 2.9                   | %          |

 

Historically,our actual losses and credits have been consistent with these provisions. Webelieve that we can make reliable estimates for doubtful accounts; however, thesize and diversity of our customer base, as well as overall economicconditions, may

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affect our abilityto accurately estimate bad debt expense. Based on our results for the three andnine months ended September 30, 2006, a ten basis point deviation in theallowance for doubtful accounts as a percentage of gross accounts receivablewould have resulted in an insignificant increase or decrease in net lossattributable to common stockholders.

***Deferred Tax Assets***

Wehave substantial deferred tax assets that relate to prior periods’ losses,primarily in the United States and the United Kingdom. We evaluate thesedeferred tax assets in each tax jurisdiction by estimating the likelihood ofgenerating future profits to realize these assets. In both jurisdictions, wehave concluded that it is more likely than not that we will generate sufficientfuture taxable income to realize these deferred tax assets. A valuationallowance has been established for deferred tax assets which we do not believemeet the more likely than not criteria established by Statement of FinancialAccount Standards No. 109, *Accounting forIncome Taxes.*This evaluation of whether it is more likely than notthat such deferred tax assets will be realized must be continuously evaluateddue to changes in market conditions, changes in tax laws, tax planningstrategies or other factors. To the extent we establish a valuation allowanceor change the allowance in a period, we will reflect the change with acorresponding increase or decrease in our tax provision in our condensedconsolidated statements of operations. At September 30, 2006, we maintained avaluation allowance on certain state net operating losses and state tax creditsbased on our assessment that it is more likely than not that the deferred taxasset related to these items will not be realized. The deferred tax asset, netof a valuation allowance of $312,000, totaled $48.4 million as ofSeptember 30, 2006 and was partially offset by deferred tax liabilities of$6.2 million.

**RESULTSOF OPERATIONS**

**Thethree and nine months ended****September 30, 2006 and 2005.**

***Hosted revenue, cost of hosted revenue, hosted gross margin***
|                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted revenue                  |       | $                                                    | 21,201     |                                                | $          | 18,965 |   | $ | 61,806 |   | $ | 58,140 |   |
|                            |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of hosted revenue          |       | 11,369                                               |       | 10,238                                              |       | 33,716 |   | 28,989 |   |
| ** **                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted gross margin             |       | $                                                    | 9,832      |                                                | $          | 8,727 |   | $ | 28,090 |   | $ | 29,151 |   |
|                            |       |                                                 |       |                                                |       |   |   |   |   |
| Hosted gross margin  percentage |       | 46                                                   | %          | 46                                                  | %          | 45 | % | 50 | % |

 

***Hosted revenue***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted revenue                     |       | $                                               | 21,201     |                                           | 12         | % | $ | 18,965 |   | $ | 61,806 |   | 6 | % | $ | 58,140 |   |
| As a percentage of  total revenues |       | 84                                              | %          |                                           |       | 76 | % | 85 | % |   |   | 89 | % |
|                                    |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Hostedrevenue is comprised of monthly fees for our FFM and FAM solutions, and monthlyor upfront fees for in-vehicle hardware devices enabling a mobile resource toutilize these FFM and FAM solutions. Our hosted revenue is affected by a numberof factors, including subscriber growth, the rate at which service features oradd-ons are adopted, the pricing associated with the size and term ofsubscriber contracts and purchases of our in-vehicle hardware devices. Giventhe generally fixed nature of our arrangements with our subscribers and ratablerevenue recognition, the impact on revenues of changes in current prices forhosted solutions is tempered. This is because revenues from new pricing arelayered on top of revenues from existing subscribers.

As new subscriberspurchase our in-vehicle hardware devices or as existing subscribers choose topurchase new in-vehicle hardware devices, the amount of deferred revenuerecognized ratably over the customer contract period increases. This effect istempered by subscribers purchasing solutions that are deployed through the useof a mobile telephone installed with our software application because we do notsell those devices and, therefore, do not recognize any revenues from sales ofmobile telephones. A

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similar tempering effectmay occur when a subscriber exceeds its initial contract period becauserecognition of deferred revenue is complete.

Wedescribe arrangements in which customers contract directly with wirelesscarriers for the wireless airtime component of our solutions as “unbundled.”Conversely, we describe arrangements in which we contract directly withcustomers for the wireless airtime portion as “bundled.” The nature of ourrelationship with the wireless carriers dictates whether we will be enteringinto a bundled or unbundled arrangement with a customer. Selection of theappropriate protocol is related primarily to optimal wireless coverage for aspecific subscriber area of operation. We have observed an increase in theproportion of new subscribers being added on an unbundled basis, resulting indecreased revenue from such subscribers. Unbundled subscribers representedapproximately 65% and 63% of our total subscribers at September 30, 2006 and2005, respectively. We expect that this trend will continue through the next 12to 18 months.

Forthe three and nine months ended September 30, 2006 compared to the three andnine months ended September 30, 2005, hosted revenue increased as the number ofsubscribers using our solutions increased. As of September 30, 2006 and 2005, theproportion of our subscribers under long-term contracts was 83% and 81%,respectively. Average monthly hosted revenue per subscription was approximately$45.87 for the three months ended September 30, 2006, up from $43.29 for thesame period in 2005. The increase of $2.58 is primarily the result of newsubscribers being added utilizing higher cost in-vehicle hardware devices.Average monthly hosted revenue per subscription was approximately $46.13 forthe nine months ended September 30, 2006, down from $46.52 for the same periodin 2005. The decrease of $0.39 is primarily the result of new subscribers beingadded utilizing an unbundled arrangement, tempered by the increased cost ofhigher in-vehicle hardware devices.

***Cost of hosted revenue***
|                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                        | ** ** | **Percent  Change**                        | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of hosted revenue              |       | $                                               | 11,369     |                                       | 11         | % | $ | 10,238 |   | $ | 33,716 |   | 16 | % | $ | 28,989 |   |
| As a percentage of  hosted revenues |       | 54                                              | %          |                                       |       | 54 | % | 55 | % |   |   | 50 | % |
|                                     |            |                                                 |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Costof hosted revenue consists of the amortization of the deferred cost of thein-vehicle enabling hardware devices; costs associated with the final assembly,testing, provisioning, delivery and installation of hardware and other costssuch as provisions for inventory and repair costs; and expenses related to thedelivery and support of our solutions. For the three months ended September 30,2006 compared to the three months ended September 30, 2005, cost of hostedrevenue increased primarily as a result of increases in amortization ofdeferred product costs of $808,000, warranty and repair charges of $379,000, employee-relatedexpenses of $279,000, equipment depreciation of $153,000, employee stock basedcompensation expense as a result of the adoption of SFAS 123R of $125,000,partially offset by decreases in the change in the provision for inventory valuationof $271,000 and airtime usage of $191,000.

 For the nine months ended September 30, 2006 comparedto the nine months ended September 30, 2005, cost of hosted revenue increasedprimarily as a result of increases in amortization of deferred product costs of$2.7 million, warranty and repair charges of $1.6 million, employee-relatedexpenses of $1.2 million, equipment depreciation of $372,000 and employee stockbased compensation expense as a result of the adoption of SFAS 123R of$340,000, partially offset by decreases in the change in the provision forinventory valuation of $692,000, airtime usage of $577,000 and product repairand refurbishment costs of $203,000.

Costof hosted revenue headcount increased to 203 at September 30, 2006 from 202 at September30, 2005. We expect cost of hosted revenue to increase during the next 12months, primarily resulting from headcount increases.

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***Hosted gross margin***
|                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hosted gross margin                 |       | $                                               | 9,832      |                                           | 13         | % | $ | 8,727 |   | $ | 28,090 |   | (4 | )% | $ | 29,151 |   |
| As a percentage of  hosted revenues |       | 46                                              | %          |                                           |       | 46 | % | 45 | % |   |   | 50 | % |
|                                     |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Forthe three months ended September 30, 2006 compared to the three months endedSeptember 30, 2005, hosted gross margin remained constant primarily due to afixed cost base on increased revenue offset by higher warranty and repair costsrelating to our continuing customers. For the nine months ended September 30,2006 compared to the nine months ended September 30, 2005, hosted gross marginsdecreased primarily due to the termination of Verizon as a customer, a fixedcost base and higher warranty and repair costs relating to our continuingcustomers.

Directexpenses generally increase at a rate proportional to the growth in oursubscribers. Personnel costs and depreciation expense generally increase at arate slower than the growth rate of our subscribers. As a result, we expectthat our hosted gross margin will increase during the next 12 months.

***Licensed revenue, cost of licensed revenue and licensed grossmargin***
|                                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed revenue                                                              |       | $                                                    | 3,954      |                                                | $          | 6,004 |   | $ | 11,295 |   | $ | 7,447 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Cost of licensed  revenue (excluding intangibles amortization included below) |       | 1,205                                                |       | 1,481                                               |       | 3,562 |   | 3,654 |   |
| Intangibles  amortization                                                     |       | 1,010                                                |       | 1,010                                               |       | 3,030 |   | 2,477 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Total cost of licensed  revenue                                               |       | 2,215                                                |       | 2,491                                               |       | 6,592 |   | 6,131 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Licensed gross margin                                                         |       | $                                                    | 1,739      |                                                | $          | 3,513 |   | $ | 4,703 |   | $ | 1,316 |   |
|                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Licensed gross margin percentage                                              |       | 44                                                   | %          | 59                                                  | %          | 42 | % | 18 | % |

 

***Licensed revenue***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed revenue                   |       | $                                               | 3,954      |                                           | (34        | )% | $ | 6,004 |   | $ | 11,295 |   | 52 | % | $ | 7,447 |   |
| As a percentage of  total revenues |       | 16                                              | %          |                                           |       | 24 | % | 15 | % |   |   | 11 | % |
|                                    |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Licensedrevenue is comprised of license fees, installation, training and PCS servicefees relating to our FSM solution, acquired in connection with our acquisitionof Vidus in February 2005. Licensed revenue decreased for the three monthsended September 30, 2006 compared to the three months ended September 30, 2005primarily due to the inclusion in the three months ended September 30, 2005 of $2.2 million relatingto the successful resolution of certain contract commitments. Licensedrevenue increased for the nine months ended September 30, 2006 compared to thenine months ended September 30, 2005 primarily due to an increase in consultingservices provided to existing customers and because the 2005 licensed revenueonly included licensed revenue from the February 18, 2005 acquisition datethrough September 30, 2005. The number of licensed users of our FSM solutiontotaled approximately 32,000 and 30,000 at September 30, 2006 and 2005,respectively.

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***Cost of licensedrevenue (excluding intangibles amortization)***
|                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of licensed  revenue (excluding intangibles amortization) |       | $                                               | 1,205      |                                           | (19        | )% | $ | 1,481 |   | $3,562 |   | (3 | )% | $ | 3,654 |   |
| As a percentage of  licensed revenues                          |       | 30                                              | %          |                                           |       | 25 | % | 32 | % |   |   | 49 | % |
|                                                                |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

Costof licensed revenue (excluding intangibles amortization) consists of employeerelated expenses in relation to installation services and the support of ourongoing PCS commitments. The decrease in cost of licensed revenue for the threemonths ended September 30, 2006 compared to the three months ended September30, 2005 is primarily due to decreases in employee-related expenses of $186,000and travel expenses of $118,000.

The decreasein cost of licensed revenue for the nine months ended September 30, 2006compared to the nine months ended September 30, 2005 is primarily due to adecrease in travel expenses of $228,000.

Costof licensed revenue headcount decreased to 33 at September 30, 2006 from 42 at September30, 2005. We expect the cost of licensed revenue to remain relatively flat overthe next twelve months.

***Licensed gross margin***
|                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Licensed gross margin                 |       | $                                               | 1,739      |                                           | (50        | )% | $ | 3,513 |   | $ | 4,703 |   | 257 | % | $1,316 |   |
| As a percentage of  licensed revenues |       | 44                                              | %          |                                           |       | 59 | % | 42 | % |   |   | 18 | % |
|                                       |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

Licensedgross margin decreased to 44% for the three months ended September 30, 2006compared to the three months ended September 30, 2005 primarily due to the inclusionin the three months ended September 30, 2005 of $2.2 million relating to the successful resolution ofcertain contract commitments. Licensed gross margin increased to42% for the nine months ended September 30, 2006 compared to the nine monthsended September 30, 2005 primarily due to an increase in licensed revenues anda fixed cost base. Direct expenses generally increase at a rate proportional tothe growth in our end users. Personnel costs and depreciation expensesgenerally increase at a rate slower than the growth rate of our end users. Weexpect our licensed gross margin to increase during the next twelve months.

***Intangibles amortization***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangibles  amortization          |       | $                                               | 1,010      |                                           | 0          | % | $ | 1,010 |   | $ | 3,030 |   | 22 | % | $ | 2,477 |   |
| As a percentage of  total revenues |       | 4                                               | %          |                                           |       | 4 | % | 4 | % |   |   | 4 | % |
|                                    |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Forthe three and nine months ended September 30, 2006 and 2005, intangiblesamortization related to the intangible assets acquired in connection with thepurchase of Vidus in February 2005. These costs are being amortized over theirestimated useful lives of three to ten years.

Amortizationof intangible assets is expected to be $4.0 million in 2006 and 2007, afterwhich it is expected to decrease as the intangible assets become fullyamortized.

30

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***Sales and marketing***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing                |       | $                                               | 5,359      |                                           | (2         | )% | $ | 5,496 |   | $ | 16,783 |   | 5 | % | $ | 15,975 |   |
| As a percentage of  total revenues |       | 21                                              | %          |                                           |       | 22 | % | 23 | % |   |   | 24 | % |
|                                    |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Salesand marketing expenses consist of employee salaries, sales commissions,marketing and promotional expenses. For the three months ended September 30,2006 compared to the three months ended September 30, 2005, sales and marketingexpenses decreased primarily as a result of decreases in employee-relatedexpenses of $239,000, consulting expenses of $115,000, and travel expenses of$91,000 partially offset by an increase in employee stock based compensationexpense as a result of the adoption of SFAS 123R of $358,000.

Forthe nine months ended September 30, 2006 compared to the nine months endedSeptember 30, 2005, sales and marketing expenses increased primarily as aresult of increases in employee stock based compensation expense as a result ofthe adoption of SFAS 123R of $925,000 and employee-related expenses of $550,000partially offset by decreases in consulting expense of $479,000 and marketingexpense of $219,000.

Salesand marketing headcount decreased to 117 at September 30, 2006 from 132 at September30, 2005. We anticipate that sales and marketing expenses will increase infuture periods as we expand our sales and marketing efforts including, but notlimited to, promotional expenses related to new solutions.

***Research and development***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development          |       | $                                               | 3,922      |                                           | 12         | % | $ | 3,487 |   | $11,801 |   | 19 | % | $ | 9,911 |   |
| As a percentage of  total revenues |       | 16                                              | %          |                                           |       | 14 | % | 16 | % |   |   | 15 | % |
|                                    |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

Researchand development expenses consist of employee salaries and expenses related todevelopment personnel and consultants, as well as expenses associated withsoftware and hardware development. For the three months ended September 30,2006 compared to the three months ended September 30, 2005, research anddevelopment expenses increased primarily as a result of an increase in employeestock based compensation expense as a result of the adoption of SFAS 123R of$276,000.

Forthe nine months ended September 30, 2006 compared to the nine months ended September30, 2005, research and development expenses increased primarily as a result of increasesin employee-related expenses of $1.0 million and employee stock basedcompensation expense as a result of the adoption of SFAS 123R of $708,000. 

Researchand development headcount increased to 155 at September 30, 2006 from 136 at September30, 2005. We anticipate that research and development expenses will increase infuture periods as we develop and introduce new solutions and as a result ofincreases in employee-related expenses associated with those solutions.

***General and administrative***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                             | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
|                               |       |                                                 |       |                                           |       |   |   |   |   |   |   |   |   |
| General and  administrative        |       | $                                                    | 4,498      |                                           | (5         | )% | $ | 4,724 |   | $ | 14,468 |   | 10 | % | $ | 13,113 |   |
| As a percentage of  total revenues |       | 18                                                   | %          |                                           |       | 19 | % | 20 | % |   |   | 20 | % |
|                                    |            |                                                      |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Generaland administrative expenses consist of employee salaries and related expensesfor executive and administrative costs, accounting and professional fees,recruiting costs and allowance for doubtful accounts. For the three monthsended September 30,

31

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2006 compared tothe three months ended September 30, 2005, general and administrative expenses decreasedprimarily as a result of decreases in employee-related expenses of $256,000, theprovision for doubtful accounts of $531,000, and travel expenses of $109,000partially offset by increases in employee stock based compensation expense as aresult of the adoption of SFAS 123R of $232,000 and legal expenses of $361,000.

Forthe nine months ended September 30, 2006 compared to the nine months ended September30, 2005, general and administrative expenses increased primarily as a resultof increases in employee stock based compensation expense as a result of the adoptionof SFAS 123R of $1.1 million, legal fees of $501,000, accounting andprofessional fees of $406,000 and accounts receivable collection costs of$241,000  partially offset by decreasesin employee-related expenses of $455,000, facility costs of $200,000 and travelexpenses of $193,000.

Generaland administrative headcount decreased to 80 at September 30, 2006 from 101 at September30, 2005. We expect that general and administrative expenses will remainrelatively flat in future periods.

Theallowance for doubtful accounts was $139,000 and $884,000 as of September 30,2006 and 2005, respectively.  The decrease in the allowance isprimarily due to non-recurring favorable adjustments as a result of improvementsin the collection history relating to our customer base that occurred during2006. We anticipate that the allowance for doubtful accounts willremain relatively stable in future periods.

***In-process research and development***
|                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| In-process research and  development |       | $                                               | —     |                                           | —     | % | $ | — |   | $ | — |   | (100 | )% | $ | 5,640 |   |
| As a percentage of  total revenues   |       | 0                                               | %          |                                           |       | 0 | % | 0 | % |   |   | 9 | % |
|                                      |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Forthe nine months ended September 30, 2005, in-process research and developmentconsisted of research projects undertaken by Vidus prior to its acquisition byus that had not reached technological feasibility and had no alternative futureuse at the time of the acquisition of Vidus. In order to achieve technologicalfeasibility, we estimated the time required to complete the projects to costapproximately $5.7 million. We estimated the fair value assigned to in-processresearch and development using the income approach, which discounts to presentvalue the cash flows expected to be attributable to the technology once itreaches technological feasibility using a discount rate of 40%. The stages ofcompletion were determined by estimating the costs and time incurred to daterelative to the costs and time expected to be incurred to develop thein-process technology into a commercially viable technology or product, whileconsidering the relative difficulty of completing the various tasks and overcomingthe obstacles necessary to attain technological feasibility. The weightedaverage stage of completion for all projects, in the aggregate, wasapproximately 80% as of the acquisition date. Cash flows from sales of productsincorporating those technologies commenced in 2005. In 2005, expenditures tocomplete the acquired in-process research and development approximated theoriginal estimates.

***Stock-based compensation***

OnJanuary 1, 2006, we adopted SFAS 123R on a modified prospective basis, whichrequires the application of the accounting standard to all share-based awardsissued on or after January 1, 2006 and any outstanding share-based awards thatwere issued in prior years but not vested as of January 1, 2006, as adjustedfor estimated forfeitures. The following table indicates the impact of SFAS123R on our statements of operations for the three and nine months ended September30, 2006.

32

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|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| Stock-based compensation:          |       |                                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Cost of hosted revenues            |       | $                                               | 125        |                                           | 100        | % | $ | — |   | $ | 340 |   | 100 | % | $ | — |   |
| Cost of licensed revenues          |       | 48                                              |       | 100                                            | %          | — |   | 120 |   | 100 | % | — |   |
| Sales and marketing                |       | 358                                             |       | 100                                            | %          | — |   | 925 |   | 100 | % | — |   |
| Research and development           |       | 276                                             |       | 100                                            | %          | — |   | 708 |   | 100 | % | — |   |
| General and administrative         |       | 232                                             |       | 100                                            | %          | — |   | 1,070 |   | 100 | % | — |   |
| Total stock-based compensation     |       | $                                               | 1,039      |                                           |       |   | $ | — |   | $ | 3,163 |   |   |   | $ | — |   |
| As a percentage of  total revenues |       | 4                                               | %          |                                           |       | 0 | % | 4 | % |   |   | 0 | % |

 

Stock-basedcompensation expense includes the amortization of the fair value of share-basedpayments made to employees and the Board of Directors, primarily in the form ofstock options and purchases under the employee stock purchase plan as weadopted the provisions of SFAS 123R effective January 1, 2006. The fair valueof the award is computed using the Black-Scholes model and is recognized asexpense over the employee’s requisite service period (generally over thevesting period of the award). Prior to the adoption of SFAS 123R, we previouslyapplied Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB 25”), andprovided the required pro forma disclosures of Statement of FinancialAccounting Standards No. 123, *Share-BasedPayment* (“SFAS 123”).

Duringthe three and nine months ended September 30, 2006, we recorded stock-basedcompensation related to stock options of $820,000 and $2.5 million,respectively, and related to the employee stock purchase plan of $219,000 and$639,000, respectively. During the three and nine months ended September 30,2006, there were 314,000 shares purchased under the employee stock purchaseplan compared to 295,000 shares purchased under the employee stock purchaseplan during the same periods in 2005.

OnOctober 27, 2005, we accelerated the vesting of 811,110 stock options withexercise prices ranging from $6.40 to $14.58, being priced above the closingstock price on such date.  We recorded pro forma compensation expenserelated to this acceleration of $5.0 million for the three months endedDecember 31, 2005. The accelerated vesting of these stock options isexpected to reduce the compensation expense associated with these options infuture periods resulting from the adoption of SFAS 123R.

As ofSeptember 30, 2006, the unrecorded deferred stock-based compensation balancerelated to stock options was $5.3 million and will be recognized over anestimated weighted average amortization period of 2.6 years. For the three andnine months ended September 30, 2006, stock-based compensation of $2,000 and$4,000, respectively, was capitalized as inventory. For the three months endingDecember 31, 2006, we expect our stock compensation expense to increase whencompared with our results for the three months ended September 30, 2006, June30, 2006 and March 31, 2006 due to the grants of new options.

***Other income (expense), net***
|                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                            |       | $                                               | 1,204      |                                           | 54         | % | $ | 781 |   | $ | 3,317 |   | 56 | % | $ | 2,128 |   |
| Change in derivative  instrument liability |       | (2,969                                          | )          | (161                                           | )%         | 4,845 |   | (3,985 | ) | (616 | )% | 772 |   |
| Other (expense) income,  net               |       | 339                                             |       | 1,894                                          | %          | 17 |   | 317 |   | 335 | % | (135 | ) |
| Total other income  (expense), net         |       | $                                               | (1,426     | )                                              | (125       | )% | $ | 5,643 |   | $ | (351 | ) | (113 | )% | $ | 2,765 |   |
| As a percentage of  total revenues         |       | 6                                               | %          |                                           |       | 23 | % | 0 | % |   |   | 4 | % |

 

Forthe three and nine months ended September 30, 2006, total other income(expense), net decreased due to decreases in the fair value of the derivativeinstrument liability partially offset by increases in interest income due tolarger invested balances and higher rates of return, when compared to the sameperiods in 2005. During the three and nine months ended September 30, 2006, werecorded an expense of $3.0 million and $4.0 million, respectively, in relationto the change in the fair value of the derivative instrument embedded in theredeemable preferred stock issued as part of the Vidus acquisition compared toincome of $4.8 million and $772,000 for the three and nine months endedSeptember 30, 2005, respectively. Other (expense) income, net consistedprimarily of immaterial

33

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net foreigncurrency exchange losses and gains resulting from transactions with ourwholly-owned subsidiaries in India and in the United Kingdom. We conductoperations primarily within the United States where inflation during the threeand nine months ended September 30, 2006 and 2005 has been low and has notmaterially impacted our operating results. Foreign currency exchange gains wereexpensed as incurred.

***Benefit from income taxes***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                        | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| Benefit from income  taxes         |       | $                                               | 164        |                                           | (100       | )% | $ | 33,822 |   | $ | 898 |   | (98 | )% | $ | 37,017 |   |
| As a percentage of  total revenues |       | 1                                               | %          |                                           |       | 135 | % | 1 | % |   |   | 56 | % |
|                                    |            |                                                 |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The benefit from incometaxes for the three and nine months ended September 30, 2006 was calculatedusing an annual projected effective yearly tax rate of approximately 8%. Forthe nine months ended September 30, 2006, we recorded a benefit from incometaxes principally due to current period losses in the United Kingdom. During the three months ended September30, 2005, based on our evaluation of then-current evidence and its expectedeffects on our estimates of future earnings, we determined that a valuationallowance reported against certain of our deferred tax assets was no longernecessary. Accordingly, during the three months ended September 30, 2005, wereversed our deferred tax valuation allowance with respect to approximately$41.3 million of our deferred tax assets, of which approximately $35.0 millionwas recorded as a benefit in the statements of operations.

 

Wecurrently believe that our fiscal 2006 effective tax rate will be a benefit of approximately8%. This effective tax rate differs from the statutory rate of 35% principallydue to the projected effects of non-deductible stock compensation of 8%,non-deductible changes in the value of the derivative embedded in the preferredstock issued in connection with the Vidus acquisition of 15%, and the tax ratedifferential on foreign losses of 5%. This effective tax rate is also based onthe projected mix of full-year income in each tax jurisdiction in which weoperate and the related income tax expense in each jurisdiction. Actual resultscould vary from those projected. The tax expenses or benefits for significantunusual items or tax exposure items are treated as discrete items in theinterim period in which the events occur.

***Preferred stock dividends***
|                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | **2006**                                             | ** ** | **Percent  Change**                            | ** ** | **2005** | ** ** | **2006** | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | ** **                                           | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Preferred stock  dividends         |       | $                                                    | 127        |                                           | 2          | % | $ | 124 |   | $ | 377 |   | 24 | % | $ | 305 |   |
| As a percentage of  total revenues |       | 1                                                    | %          |                                           |       | 0 | % | 1 | % |   |   | 0 | % |
|                                    |            |                                                      |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Preferredstock dividends consist of dividends on redeemable preferred stock issued by usin connection with the acquisition of Vidus. The holders of our preferred stockare entitled to receive dividends at the rate of $6.50 per share annually. Thedividends accrue day to day, whether or not earned or declared, from the dateof the acquisition. The dividends are payable when and if declared by the Boardof Directors or upon redemption of the preferred stock. Any accumulation ofunpaid dividends on the preferred stock does not bear interest.

34

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**LIQUIDITYAND CAPITAL RESOURCES**
|                                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                            | ** ** | **Percent  Change** | ** ** | **2005** | ** ** |
| Net loss                                              |       | $                                                   | (9,712     | ) | (138 | )% | $ | 25,610 |   |
| Non-cash charges (benefits)                           |       | 11,319                                              |       | (141 | )% | (27,387 | ) |
| Change in working capital assets and liabilities      |       | (8,532                                              | )          | (27 | )% | (11,756 | ) |
| Net cash used in operating activities                 |       | (6,925                                              | )          | (49 | )% | (13,533 | ) |
| Net cash (used in) provided by investing activities   |       | (3,749                                              | )          | (109 | )% | 40,430 |   |
| Net cash provided by financing activities             |       | 1,916                                               |       | 55 | % | 1,235 |   |
| Net (decrease)  increase in cash and cash equivalents |       | $                                                   | (8,758     | ) | (131 | )% | $ | 28,132 |   |

 

As ofSeptember 30, 2006, we had $17.0 million of cash and cash equivalents, $77.5million of short-term investments and $101.0 million of working capital.

Forthe nine months ended September 30, 2006, net cash used in operating activitiesincreased $6.6 million to $6.9 million compared to the nine months endedSeptember 30, 2005. The increase was primarilyattributable to a change in working capital of $3.2 million and a non-cash benefitof $42.1 million related to the reversal of the deferred tax valuationallowance, partially offset by increases in net loss of $35.2 million andnon-cash charges of $3.4 million. Non-cash charges to earnings includein-process research and development expenses, depreciation and amortizationexpenses, provisions for doubtful accounts and sales returns, provisions forinventory valuation, stock based compensation expense, changes in the value ofthe derivative instrument liability and tax benefits on the exercise ofemployee stock options (for 2005 only).

Forthe nine months ended September 30, 2006, the net cash used by investingactivities was comprised of $54.4 million in proceeds from the sale ofshort-term investments, partially offset by $54.2 million used to purchaseshort-term investments and $4.0 million used to purchase property andequipment. For the nine months ended September 30, 2005, the net cash providedby investing activities was comprised of $125.7 million in proceeds from thesale of short-term investments, partially offset by $75.3 million used topurchase short-term investments, $6.9 million used for the acquisition ofVidus, net of cash acquired and $3.1 million used to purchase property andequipment. Purchases of property and equipment related mainly to purchases ofcomputer equipment and software to support our growth in operations,infrastructure and headcount. We currently do not have any material commitmentsfor capital expenditures, although we anticipate increases in capitalexpenditures and lease commitments with our expected growth in operations andinfrastructure over the next twelve months. We also may establish additionaloperations as we expand globally.

Thenet cash flows provided by financing activities for the nine months endedSeptember 30, 2006 and 2005 were $1.9 million and $1.2 million,respectively, resulting from proceeds from the exercise of stock options,purchases of common stock under our employee stock purchase plan and the excesstax benefit on the exercise of employee stock options (for 2006 only)

Inconnection with the Vidus acquisition, we issued redeemable preferred stock.Each share of Series A-1 and A-2 preferred stock is redeemable for anamount equal to (i) $100, plus (ii) all declared or accumulated butunpaid dividends. Each share of Series B-1 and B-2 preferred stock isredeemable for an amount equal to (i) $100, plus (ii) all declared oraccumulated but unpaid dividends, plus (iii) the top-up amount of$731.  The holders of the Series A-1and B-1 preferred stock may elect to redeem all or a portion of the shares atany time, and the holders of the Series A-2 and B-2 preferred stock mayelect to redeem all or a portion of the shares on or after February 18,2007. On or after February 18, 2009, the Company may redeem all or anyportion of the Series A-1, A-2, B-1, and B-2 preferred stock.  The aggregate amount payable upon redemption ofall shares of the preferred stock is $14.9 million (which includes the $100 pershare redemption price and the top-up amount for Series B-1 and B-2 preferredstock), plus all declared or accumulated but unpaid dividends, which were$813,000 as of September 30, 2006.

Webelieve that existing cash, cash equivalents and short-term investments,together with any cash generated from operations, will be sufficient to fundour operating activities, capital expenditures and other obligations for atleast the next twelve months.

***Commitments and Contingencies***

Wehave certain fixed contractual obligations and commitments that include futureestimated payments. Changes in our business needs, cancellation provisions,changing interest rates, and other factors may result in actual paymentsdiffering from the estimates. We cannot provide certainty regarding the timingand amounts of all payments. We have presented below, a summary of the mostsignificant assumptions used in our determination of amounts presented in thetables in order to assist in the review of this information

35

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within the context of our consolidated financialposition, results of operations and cash flows. The following table summarizesour fixed contractual obligations as of September 30, 2006 (in thousands):
|                                   | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
|-----------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Operating lease obligations(1)    |       | $         | 7,687      |                            | $          | 2,016              |       | $                  | 4,894      |                             | $          | 777 |   | $ | — |   |
| Capital lease obligations(2)      |       | 54        |       | 54                              |       | —             |       | —             |       | —                           |       |
| Other purchase obligations(3)     |       | 4,905     |       | 4,905                           |       | —             |       | —             |       | —                           |       |
| Inventory purchase obligations(4) |       | 2,830     |       | 2,830                           |       | —             |       | —             |       | —                           |       |
|                              |       | $         | 15,476     |                            | $          | 9,805              |       | $                  | 4,894      |                             | $          | 777 |   | $ | — |   |

 

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(1) Operatinglease commitments include minimum rental payments under our non-cancelableoperating leases for office facilities, as well as limited office equipmentthat we utilize under lease arrangements. The amounts presented are consistentwith contractual terms and are not expected to differ significantly unless asubstantial change in our headcount requires us to exit an office facilityearly or expand our occupied space.

(2) Capital leaseobligations are included in the balance sheet under property, plant andequipment, net and primarily include minimum rental payments under ournon-cancelable leases for office equipment and furniture.

(3) Other purchaseobligation amounts include minimum purchase commitments for marketing, computerequipment, software applications, engineering development services and othergoods and services that were entered into in the ordinary course of business.Purchase obligations include agreements that are cancelable without penalty.Certain of these contractual arrangements contain significant performancerequirements. Given the significance of the performance requirements, actualpayments could differ significantly from these estimates.

(4) Inventorypurchase commitments include minimum payments under non-cancelable commitmentsfor goods that were entered into in the ordinary course of business.

**Off-BalanceSheet Arrangements**

As of September30, 2006, we had no off-balance sheet arrangements that have had, or arereasonably likely to have, a current or future material effect on ourconsolidated financial condition, results of operations, liquidity or capitalresources.

**Impactof Recently Issued Accounting Pronouncements**

InNovember 2005, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position (“FSP”) Nos. SFAS 115-1 and SFAS 124-1, *The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*. This FSP addresses thedetermination as to when an investment is considered impaired, whether thatimpairment is other than temporary and the measurement of an impairment loss.This FSP also includes accounting considerations subsequent to the recognitionof other-than-temporary impairments. The adoption of the FSP did not have amaterial impact on our condensed consolidated statement of operations andfinancial condition.

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123 (revised 2004),*Share-Based Payment* (“SFAS 123R”), that addresses theaccounting for stock-based payment transactions in which an enterprise receivesemployee services in exchange for either equity instruments of the enterpriseor liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments. Thestatement eliminates the ability to account for stock-based compensationtransactions using the intrinsic value method as prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB 25”), and generallyrequires that such transactions be accounted for using a fair value basedmethod and recognized as expense in the condensed consolidated statement ofoperations. SFAS 123R also requires additional accounting for the taxbenefit on employee stock options and for stock issued under our employee stockpurchase plan. The adoption of SFAS 123R on January 1, 2006, had amaterial impact on our results of operations and financial position. See “Note 9– Stock Based Compensation” to the Condensed Consolidated Financial Statementsfor additional disclosure related to SFAS 123R.

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On June 7,2005, the FASB issued SFAS No. 154, *AccountingChanges and Error Corrections, a replacement of APB Opinion No 20, AccountingChanges, and Statement No 3, Reporting Accounting Changes in Interim FinancialStatements*(“SFAS 154”). SFAS 154 changes the requirementsfor accounting and reporting a change in accounting principle. Previously, mostvoluntary changes in accounting principles were required to be recognized byway of a cumulative effect adjustment within net income during the period ofthe change. SFAS 154 requires retrospective application to prior periods’financial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS 154is effective for accounting changes made in fiscal years beginning afterDecember 15, 2005; however, SFAS 154 does not change the transitionprovisions of any existing accounting pronouncements.

In July 2006, the FASBissued Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*. FIN 48 prescribes a comprehensivemodel for how a company should recognize, measure, present, and disclose in itsfinancial statements uncertain tax positions that the company has taken orexpects to take on a tax return. Under the Interpretation, the financialstatements will reflect expected future tax consequences of such positionspresuming the taxing authorities' full knowledge of the position and allrelevant facts, but without considering time values. FIN 48 is effective for usbeginning January 1, 2007. We have not yet completed our evaluation of theimpact that adoption of FIN 48 will have on our condensed consolidatedstatement of operations and financial condition.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, Section N to Topic 1, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*(“SAB 108”). SAB 108 requires the evaluation of prior-year misstatements usingboth the balance sheet approach and the income statement approach. In theinitial year of adoption should either approach result in quantifying an errorthat is material in light of quantitative and qualitative factors, SAB 108 guidanceallows for a one-time cumulative-effect adjustment to beginning retainedearnings. In years subsequent to adoption, previously undetected misstatementsdeemed material shall result in the restatement of previously issued financialstatements in accordance with SFAS 154. SAB 108 is effective for us on December31, 2006. The adoption of SAB 108 will not have an impact on our condensedconsolidated statement of operations and financial condition.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements* (“SFAS 157”). SFAS157 defines fair value, establishes a framework for measuring fair value, andexpands disclosure requirements regarding fair value measurement. Whereapplicable SFAS 157 simplifies and codifies fair value-related guidancepreviously issued within generally accepted accounting principles (“GAAP”).SFAS 157, is effective for us beginning January 1, 2008. We have not yetcompleted our evaluation of the impact that adoption of SFAS 157 will have on ourcondensed consolidated statement of operations and financial condition. 

**FACTORSTHAT COULD AFFECT FUTURE RESULTS**

In addition to the other information contained in thisQuarterly Report on Form 10-Q, the following factors should be carefullyconsidered in evaluating our business and prospects. The risks anduncertainties described below are intended to be ones that are specific to usor our industry and that we deem material, but they are not the only ones thatwe face.

**Under the terms of our customercontracts for our hosted solutions, once the contract period expires, a customermay terminate our services with little or no notice.**

Our customer contracts for our hosted solutionstypically provide for a contract period of one to five years. Under the termsof a typical contract, a customer will often be subject to a termination fee ifit chooses to terminate the contract before the contract period expires. Oncethe contract period has expired, and unless a customer has executed a newcontract, the terms of the contract will remain in force on a month-to-monthbasis, allowing the customer to terminate the contract by giving very shortnotice and without incurring any termination fee. The termination of asignificant number of customer contracts or customer contracts providing amaterial portion of our revenues, could cause our business to suffer andadversely affect our financial results.

**Our success depends upon our abilityto develop new solutions and enhance our existing solutions. If we cannotdeliver the features and functionality our customers demand, we will be unableto retain or attract new customers.**

If we are unable to develop new solutions, are unableto enhance and improve our solutions successfully in a timely manner, or failto position and/or price our solutions to meet market demand, we may notattract new customers, existing customers may not expand their use of oursolutions, and our business and operating results will be adversely affected.If our enhancements to existing solutions do not deliver the functionality thatour customer base demands, our customers may choose not to renew theiragreements with us when they reach the end of their initial contract periods,and our business and operating results will be adversely affected. If

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we cannot effectively deploy, maintain and enhance oursolutions, our revenues may decrease, we may not be able to recover our costs,and our competitive position may be harmed.

**We face competition from internaldevelopment teams of potential customers and from existing and potentialcompetitors, and if we fail to compete effectively, our ability to acquire newcustomers could decrease, our revenues would decline and our business wouldsuffer.**

The market for MRM solutions is competitive and isexpected to become even more competitive in the future. If we do not competeeffectively, competition could harm our business and limit our ability toacquire new customers and grow revenues, which in turn could result in a lossof our market share and decline in revenues. We believe that our solutions facecompetition from a number of business productivity solutions, including:

·      solutionsdeveloped internally by our prospective customers’ information technologystaff, particularly by large customer prospects;

·      discretemeans of communication with mobile workers, such as pagers, two-way radios, handhelddevices and cellular telephones;

·      solutionstargeted at specific vertical markets, such as a service offered by Qualcommthat monitors assets in the long-haul transportation sector;

·      solutionsdesigned to help companies schedule and route their mobile workers; and

·      solutionsoffered by smaller market entrants, many of which are privately held andoperate on a regional basis.

In addition, we believe that our solutions facecompetition from manufacturing companies that seek to enter the mobile resourcemanagement market, such as Trimble Navigation.

We may also face competition from our current andpotential alliances, such as wireless carriers, that may develop their ownsolutions, develop solutions with captive and other suppliers or support themarketing of solutions of other competitors.

We also face numerous challenges associated withovercoming the following competitive factors:

·      *Size and resources.  *Many ofour current and potential competitors have access to substantially greaterfinancial, marketing, distribution, engineering and manufacturing resourcesthan we do, which may enable them to react more effectively to new marketopportunities and customer requirements. Furthermore, these competitors may beable to adopt more aggressive pricing policies and offer more attractive termsthan we can.

·      *Name recognition.  *Many of ourcurrent and potential competitors have greater name recognition and marketpresence than we do, which may allow them to more effectively market and sellsolutions to our current and potential customers.

·      *Limits of product and service offerings.  *Althoughwe offer a broad range of mobile resource management solutions, a customerprospect may require functionality that we do not offer, which may enablecurrent and potential competitors to exploit the areas in which we do notdevelop solutions.

·      *Customer relationships.  *Manyof our current and potential competitors have pre-existing relationships withour large customer prospects, which may allow them to more effectively marketand sell competitive MRM solutions.

**As we seek to serve larger customers,we face competition from businesses with greater financial resources, and wemay be unable to compete effectively with these businesses.**

The existing market is competitive. Competition isparticularly vigorous for larger customers, which is a customer segment we haveworked to serve. We expect competition to increase further as companies developnew products and/or modify their existing products to compete directly withours. In addition, competitors may reduce prices to customers and seek toobtain our customers through cost-cutting and other measures. To the extentthese companies compete effectively with us, our business could be adverselyaffected by extended sales cycles, fewer sales, and lower prices, revenue andmargins.

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**If wireless communications providerson which we depend for services decide to adopt new wireless technologies, orabandon or do not continue to expand their wireless networks, our operationsmay be disrupted, we may lose customers and our revenues could decrease.**

Currently,our solutions function on general packet radio service (“GPRS”), code divisionmultiple access (“CDMA”) 1XRTT, evolution-data optimized (“EvDO”), integrateddigital enhanced network (“iDEN”) and enhanced data rates for GSM evolution(“EDGE”) networks. These protocols cover only portions of the United States,Europe and Canada. In the first quarter of 2006, we completed a costly and timeconsuming migration from CDPD to the protocols set forth above after wirelesscommunications providers abandoned their CDPD networks in favor of newertechnologies. If wireless communications providers abandon the protocols uponwhich our solutions now function in favor of other types of wireless technology,we may not be able to provide services to our customers, or we may be forced toincur considerable costs in order to adapt our solutions to new protocols. Inaddition, if cellular carriers do not expand their coverage areas, we will beunable to meet the needs of customers who may wish to use our services outsidethe current cellular coverage area.

**On February 18, 2005, weacquired Vidus. The combined company may not realize expected benefits becauseof integration and other challenges.**

If the combined company fails to meet the challengesinvolved in integrating operations and products successfully or otherwise failsto realize any of the anticipated benefits of the acquisition, then the resultsof operations of the combined company could be seriously harmed. Realizing thebenefits of the acquisition, if any, will depend in part on the successfulintegration of technology, operations and personnel. The integration of thecompanies is a complex, time-consuming and expensive process that couldsignificantly disrupt the business of the combined company.

The combined company may not successfully integratethe operations of @Road and Vidus in a timely manner, or at all, and thecombined company may not realize the anticipated benefits of the acquisition tothe extent, or in the timeframe, anticipated. The anticipated benefits of theacquisition are based on projections and assumptions, including successfulintegration, not actual experience. In addition to the integration risksdiscussed above, the combined company’s ability to realize those benefits couldbe adversely affected by practical or legal constraints on its ability tocombine operations.

**If the value of Vidus’ goodwill andor intangibles becomes impaired, we may be required to incur significant coststhat would adversely affect our financial results.**

Under the purchase method of accounting, the combinedcompany allocated the total estimated purchase price of $46.3 million to Vidus’tangible assets, purchased technology and other intangible assets and liabilitiesassumed based on their fair values as of the date of completion of theacquisition, and recorded the excess of the purchase price over those fairvalues as goodwill. The combined company will incur amortization expense overthe useful lives of amortizable intangible assets acquired in connection withthe acquisition. In addition, to the extent the value of goodwill and orintangibles becomes impaired, the combined company may be required to incurmaterial charges relating to the impairment of these assets. Any potentialimpairment charge could have a material impact on the combined company’sresults of operations and could have a material adverse effect on the marketvalue of our common stock.

**Any material weakness or significantdeficiency identified in our internal controls could have an adverse effect onour business.**

Section 404 of the Sarbanes-Oxley Act of 2002requires that companies evaluate and report on their internal control structureand procedures for financial reporting. As part of our first quarter 2005 andfourth quarter 2005 closing processes and assessments of internal control overour financial reporting, we identified two internal control deficiencies thatconstituted material weaknesses. The first material weakness concerned our interpretationand implementation of various complex accounting principles in the area ofnon-recurring transactions, and the second concerned our calculation and timelyreview of the annual tax provision for 2005. These material weaknesses were notfully remediated as of September 30, 2006. Please see Item 4 “Controls andProcedures” in this Quarterly Report on Form 10-Q, in our Quarterly Report onForm 10-Q for the three months ended June 30, 2006 and in our Quarterly Reporton Form 10-Q/A for the three months ended March 31, 2006, and Item 9A “Controlsand Procedures” in Part II of our Annual Report on Form 10-K/A for the yearended December 31, 2005 for additional information. There can be no assurancethat there will not be other significant deficiencies or material weaknessesthat would be required to be reported in the future. In addition, we expect theevaluation process and any required remediation, if applicable, will increaseour accounting, legal and other costs, and may divert management resources fromother business objectives and concerns.

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**Our stock price is volatile, whichmay cause you to lose money and could lead to costly litigation against us thatcould divert our resources.**

From time to time, stock markets experience dramaticprice and volume fluctuations, particularly for shares of technology companies.These fluctuations can be unrelated to the operating performance of thesecompanies. Broad market fluctuations may reduce the market price of our commonstock and cause you to lose some or all of your investment. These fluctuationsmay be exaggerated if the trading volume of our common stock is low. Inaddition, due to the technology-intensive nature and growth rate of ourbusiness and the MRM market, the market price of our common stock may rise andfall in response to:

·      quarterlyvariations in operating results;

·      failureto achieve operating results anticipated by securities analysts and investors;

·      changesin estimates of our financial performance or changes in recommendations bysecurities analysts;

·      announcementsof technological or competitive developments;

·      thegain or loss of a significant customer or order;

·      dispositionof shares of our common stock held by large investors; and

·      acquisitionsor strategic alliances by us or our competitors.

When the market price of a company’s stock dropssignificantly, stockholders often institute securities class action lawsuitsagainst that company. A lawsuit against us could cause us to incur substantialcosts and could divert the time and attention of our management and otherresources from our business.

**Our business is subject to the risksassociated with international operations.**

We recently began offering our products and servicesin Europe and Asia. A significant portion of our revenue is derived from ourinternational operations. We have limited experience operating in these foreignjurisdictions. As a result, our operating results and financial condition couldbe significantly affected by risks associated with international activities, includingeconomic and labor conditions, political instability, tax laws (includingUnited States taxes on foreign subsidiaries), the enactment of new lawsaffecting our activities, government regulation of our activities, and changesin the value of the United States dollar relative to the local currency inwhich our products are sold and our goods and services are purchased.

**Our quarterly operating results aresubject to fluctuations, and our stock price may decline if we do not meet theexpectations of investors and analysts.**

Our quarterly revenues and operating results aredifficult to predict and may fluctuate significantly from quarter to quarterdue to a number of factors, many of which are outside our control. Thesefactors include, but are not limited to:

·      changesin the market for MRM solutions;

·      delaysin market acceptance or implementation of our solutions by customers;

·      changesin length of sales cycles of, or demand by, our customers for existing andadditional solutions;

·      changesin the productivity of our distribution channels;

·      introductionof new solutions by us or our competitors;

·      changesin our pricing policies or those of our competitors or suppliers;

·      changesin our mix of sources of revenues;

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·      generaleconomic and political conditions;

·      wirelessnetworks, positioning systems and Internet infrastructure owned and controlledby others; and

·      anyneed to migrate to new wireless networks, which could cause our solutions to beincompatible with new wireless networks or become out of date.

Our expense levels are based, in part, on ourexpectation of future revenues. Additionally, a substantial portion of ourexpenses is relatively fixed. As a result, any shortfall in revenues relativeto our expectations could cause significant changes in our operating resultsfrom quarter to quarter. We believe period-to-period comparisons of our revenuelevels and operating results are not meaningful. You should not rely on ourquarterly revenues and operating results to predict our future performance. Ouroperating results have been, and in some future quarters our operating resultsmay be, below the expectations of public market analysts and investors and, asa result, the price of our common stock may fall.

**If one or more of the agreements wehave with wireless communications providers is terminated and as a result, weare unable to offer our solutions to customers within a wireless communicationsprovider’s coverage area, we may be unable to deliver our solutions, we maylose customers, and our revenues could decrease.**

Our existing agreements with wireless communicationsproviders may, in some cases be terminated immediately upon the occurrence ofcertain conditions or with prior written notice. If one or more of our wirelesscommunications providers decides to terminate or not to renew its contract withus, we may incur additional costs relating to obtaining alternate coverage fromanother wireless communications provider outside of its primary coverage area,or we may be unable to replace the coverage at all, causing a complete loss ofservices to our customers in that coverage area.

**We have a history of losses and maynot achieve or increase profitability in the future.**

We have a history of losses and may not achieve orincrease profitability in the future. As of September 30, 2006, we had an accumulateddeficit of approximately $88.8 million. To achieve profitability, we will needto generate significant revenues to offset our cost of revenues and our salesand marketing, research and development and general and administrativeexpenses. We may not achieve or sustain our revenue or profit goals and mayincur losses in the future. Changes such as increases in our pricing forsolutions or the pricing of competing solutions may harm our ability to increasesales of our solutions to new and existing customers. If we are not able toexpand our customer base and increase our revenue from new and existingcustomers, we may continue to be unprofitable.

**We may establish alliances or acquiretechnologies or companies in the future, which could result in the dilution ofour stockholders and disruption of our business, which could reduce ourrevenues or increase our costs.**

We are continually evaluating business alliances andexternal investments in technologies related to our business. Acquisitions ofcompanies, divisions of companies, businesses or products and strategicalliances entail numerous risks, any of which could materially harm ourbusiness in several ways, including:

·      diversionof management’s attention from our core business objectives and other businessconcerns;

·      failureto integrate efficiently businesses or technologies acquired in the future withour pre-existing business or technologies;

·      potentialloss of key employees from either our pre-existing business or the acquiredbusiness;

·      dilutionof our existing stockholders as a result of issuing equity securities; and

·      assumptionof liabilities of the acquired company.

Some or all of these problems may result from currentor future alliances, acquisitions or investments. Furthermore, we may notrealize any value from these alliances, acquisitions or investments.

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**We depend on a limited number ofthird parties to manufacture and supply certain components of our solutions.**

We rely on a limited number of sole suppliers forcertain components of our solutions. We do not have long-term agreements withthese suppliers. If these parties do not perform their obligations, or if theycease to supply the components needed for our solutions, we may be unable tofind other suppliers and our business would be seriously harmed. We cannot besure that alternative sources for these components will be available whenneeded, or if available, that these components will be available oncommercially reasonable terms. These sole suppliers include Motorola, whichsupplies microcontrollers for use in our Internet Location Manager, Micronet,which supplies our *i*DT devices,and Everex, which supplies our *i*LM-W device.

It is our practice to attempt to maintain no more thana three to nine month supply of microcontrollers, *i*DT devices and other components and devices needed for oursolutions. Although we believe that we have sufficient quantities of suchcomponents and devices to last the next three to nine months, if any of our arrangementswith our suppliers and manufacturers are terminated, if we are unable to obtainsufficient quantities of any products or components critical for our solutions,if the quality of these products or components is inadequate, or if the termsfor supply of these products or components become commercially unreasonable,our search for additional or alternate suppliers and manufacturers could resultin significant delays, added expense and our inability to maintain or expandour customer base. Any of these events could require us to take unforeseenactions or devote additional resources to provide our products and services andcould harm our ability to compete effectively.

**A disruption of our services or ofour software applications due to accidental or intentional security breachesmay harm our reputation, cause a loss of revenues and increase our expenses.**

Unauthorized access, computer viruses and otheraccidental or intentional actions could disrupt our information systems orcommunications networks or could adversely impact the functionality andsecurity of our software products. We expect to incur significant costs toprotect against the threat of security breaches and to alleviate problemscaused by any breaches. Currently, the wireless transmission of our customers’proprietary information is not protected by encryption technology. If a thirdparty were to misappropriate our customers’ proprietary information oradversely impact the operations of our customers, we could be subject toclaims, litigation or other potential liabilities that could seriously harm ourrevenues and result in the loss of customers.

**System or network failures couldreduce our sales, increase costs or result in liability claims.**

Any disruption to our services, information systems orcommunications networks or those of third parties could result in the inabilityof our customers to receive our services for an indeterminate period of time.Our hosted solutions and related operations depend upon our ability to maintainand protect our computer systems at data centers located in Ashburn, Virginiaand Redwood City, California, and our network operations center in Fremont,California. The facilities in California are in or near earthquake fault zones.Our services may not function properly and we may not be able to adequatelysupport and maintain our software products if our systems fail, if there is aninterruption in the supply of power, or if there is an earthquake, fire, floodor other natural disaster, or an act of war or terrorism. Within each of ourdata centers, we have fully redundant systems; however, in the event of asystem or network failure, the process of shifting access to customer data fromone data center to the other would be performed manually, and could result in afurther disruption to our services and our ability to adequately support andmaintain our software products. Any disruption to our services could cause usto lose customers or revenue, or face litigation, customer service or repairwork that would involve substantial costs and could distract management fromoperating our business.

**Our success and ability to competedepend upon our ability to secure and protect patents, trademarks and otherproprietary rights.**

Our success and ability to compete depend on ourability to protect our proprietary rights to the technologies used to implementand operate our solutions in the United States, the United Kingdom and in othercountries. In the event that a third party breaches the confidentialityprovisions or other obligations in one or more of our agreements ormisappropriates or infringes our intellectual property rights or theintellectual property rights licensed to us by third parties, our businesscould be seriously harmed. To protect our proprietary rights, we rely on acombination of trade secrets, confidentiality and other contractual provisionsand agreements, and patent, copyright and trademark laws, which afford us onlylimited protection. Third parties may independently discover or inventcompeting technologies or reverse engineer our trade secrets, software or othertechnology. Furthermore, laws in some foreign countries may not protect ourproprietary rights to the same extent as the laws of the United States.Therefore, the measures we take to protect our proprietary rights may not beadequate.

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**Claims that we infringe third-partyproprietary rights could result in significant expenses or restrictions on ourability to provide our solutions.**

Third parties may claim that our current or futuresolutions infringe their proprietary rights or assert other claims against us.As the number of entrants into our market increases, the possibility of anintellectual property or other claim against us grows. Any intellectualproperty or other claim, with or without merit, would be time-consuming andexpensive to litigate or settle and could divert management’s attention fromour core business. As a result of such a dispute, we may have to pay damages,incur substantial legal fees, develop costly non-infringing technology, ifpossible, or enter into license agreements, which may not be available on termsacceptable to us, if at all. Any of these results would increase our expensesand could decrease the functionality of our solutions, which would make oursolutions less attractive to our current or potential customers. We have agreedin some of our agreements, and may agree in the future, to indemnify otherparties for any expenses or liabilities resulting from claimed infringements ofthe proprietary rights of third parties.

**If our customers do not have accessto sufficient capacity on reliable wireless networks, we may be unable todeliver our services, our customers’ satisfaction could decline and ourrevenues could decrease.**

Part of our ability to grow and maintain profitabilitydepends on the ability of wireless carriers to provide sufficient networkcapacity, reliability and security to our customers. Even where wirelesscarriers provide coverage to entire metropolitan areas, there are occasionallapses in coverage, for example due to tunnels blocking the transmission ofdata to and from wireless modems used with our solutions. These effects couldmake our services less reliable and less useful, and customer satisfactioncould suffer.

**We depend on GPS technology owned andcontrolled by others. If we do not have continued access to GPS technology orsatellites, we will be unable to deliver a majority of our solutions andrevenues will decrease.**

A majority of our solutions rely on signals fromglobal positioning system (“GPS”) satellites built and maintained by the UnitedStates Department of Defense. GPS satellites and their ground support systemsare subject to electronic and mechanical failures and sabotage. If one or moresatellites malfunction, there could be a substantial delay before they arerepaired or replaced, if at all, our products and services may cease tofunction, and customer satisfaction would suffer.

In addition, the United States government could decideto discontinue operation and maintenance of GPS satellites or to charge for theuse of GPS. Furthermore, because of ever-increasing commercial applications ofGPS and international political unrest, United States government agencies maybecome increasingly involved in the administration or the regulation of the useof GPS signals in the future. If factors such as the foregoing affect GPS, forexample by affecting the availability, quality, accuracy or pricing of GPStechnology, our business will suffer.

**Defects or errors in our solutionscould result in the cancellation of or delays in the implementation of oursolutions, which would damage our reputation and harm our financial condition.**

We must develop our solutions quickly to keep pacewith the rapidly changing MRM market. Solutions that address this market arelikely to contain undetected errors or defects, especially when firstintroduced or when new versions are introduced. We may be forced to delaycommercial releases of new solutions or updated versions of existing solutionsuntil such errors or defects are corrected, and in some cases, we may need toimplement enhancements to correct errors that were not detected until afterdeployment of our solutions. Even after testing and release, our solutions maynot be free from errors or defects, which could result in the cancellation ordisruption of our services or dissatisfaction of customers. In some cases,customers may terminate their agreements with us without penalty if thesolution we have provided does not meet the specifications agreed upon by theparties. Such contract terminations or customer dissatisfaction would damageour reputation and result in lost revenues, diverted development resources, andincreased support and warranty costs.

**The production or reporting ofinaccurate information could cause the loss of customers and expose us to legalliability.**

The accurate production and reporting of informationis critical to our customers’ businesses. If we fail to accurately produce andreport information, we could lose customers, our reputation and ability toattract new customers could be harmed, and we could be exposed to legalliability. We may not have insurance adequate to cover losses we may incur as aresult of these inaccuracies.

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**Our success depends on our ability tomaintain and expand our sales channels.**

To increase our market awareness, customer base andrevenues, we need to expand our direct and indirect sales operations. There isstrong competition for qualified sales personnel, and we may not be able toattract or retain sufficient new sales personnel to expand our operations. Newsales personnel require training, and it takes time for them to achieve fullproductivity, if at all. In addition, we believe that our success is dependenton the expansion of our indirect distribution channels, including ourrelationships with wireless carriers, independent sales agents and resellers.These sales channel alliances require training in selling our solutions and itwill take time for these alliances to achieve productivity, if at all. We maynot be able to establish relationships with additional distributors on a timelybasis, or at all. Our independent sales agents and resellers, many of which arenot engaged with us on an exclusive basis, may not devote adequate resources topromoting and selling our solutions.

**We depend on recruiting and retainingqualified personnel, and our inability to do so may result in a loss in sales,impair our ability to effectively manage our operations or impair our abilityto develop and support our solutions.**

Because of the technical nature of our solutions andthe market in which we compete, our success depends on the continued servicesof our current executive officers and our ability to attract and retainqualified personnel with expertise in wireless communications, GPStechnologies, hosted software applications, transaction processing and theInternet. Competitors and others have recruited our employees in the past andmay attempt to do so in the future. In addition, new employees generallyrequire substantial training, which requires significant resources andmanagement attention. Even if we invest significant resources to recruit, trainand retain qualified personnel, there can be no assurances that we will besuccessful in our efforts.

**From time to time, we are or may besubject to litigation that could result in significant costs to us.**

From time to time, we are or may be subject tolitigation in the ordinary course of business relating to any number or type ofclaims, including claims for damages related to errors and malfunctions of ourproducts and services or their deployment. A securities, product liability,breach of contract, or other claim could seriously harm our business because ofthe costs of defending the lawsuit, diversion of employees’ time and attention,and potential damage to our reputation. Some of our agreements with customers,suppliers and other third parties contain provisions designed to limit exposureto potential claims. Limitation of liability provisions contained in ouragreements may not be enforceable under the laws of some jurisdictions. As aresult, we could be required to pay substantial amounts of damages insettlement or upon the determination of any of these types of claims. Althoughwe carry general liability and directors and officers insurance, our insurancemay not cover potential claims or may not be adequate to cover all costsincurred in defense of potential claims or to indemnify us for all liabilitiesthat may be imposed.

**Government regulations and standardscould subject us to increased regulation, increase our costs of operations orreduce our opportunities to earn revenue.**

In addition to regulations applicable to businesses ingeneral, we may also be subject to direct regulation by United Statesgovernmental agencies, including the Federal Communications Commission,Department of Defense, Department of Commerce or the State Department. Theseregulations may impose licensing requirements, privacy safeguards relating tocertain subscriber information, or safety standards, for example with respectto human exposure to electromagnetic radiation and signal leakage. A number oflegislative and regulatory proposals under consideration by federal, state,provincial, local and foreign governmental organizations may lead to laws or regulationsconcerning various aspects of the Internet, wireless communications and GPStechnology, including on-line content, user privacy, taxation, access chargesand liability for third-party activities. Additionally, it is uncertain howexisting laws governing issues such as taxation on the use of wirelessnetworks, intellectual property, libel, user privacy and property ownershipwill be applied to our solutions. The adoption of new laws or the applicationof existing laws may expose us to significant liabilities and additionaloperational requirements, which could decrease the demand for our solutions andincrease our cost of doing business. Wireless communications providers whosupply us with airtime are subject to regulation by the Federal CommunicationsCommission, and regulations that affect them could also increase our costs orlimit our ability to provide our solutions.

**Fluctuations in the value of foreigncurrencies could result in decreased revenues, increased product costs andoperating expenses.**

We have customers, suppliers and manufacturers thatare located outside the United States. Some transactions relating to supply anddevelopment agreements may be conducted in currencies other than the UnitedStates dollar, and fluctuations in the value of foreign currencies relative tothe United States dollar could cause us to incur currency exchange costs. Inaddition, some of our transactions denominated in United States dollars may besubject to currency exchange rate risk. We cannot predict the effect of

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exchange rate fluctuations on our future operatingresults. Should there be a sustained increase in average exchange rates for thelocal currencies in these countries, our suppliers and manufacturers mayrequest a price increase at the end of the contract period.

**Geopolitical, economic and militaryconditions, including terrorist attacks and other acts of war, may materiallyand adversely affect the markets on which our common stock trades, the marketsin which we operate, our operations and our profitability.**

Terrorist attacks and other acts of war, and anyresponse to them, may lead to armed hostilities and such developments wouldlikely cause instability in financial markets. Armed hostilities and terrorismmay directly impact our facilities, personnel and operations which are locatedin the United States, the United Kingdom, Australia and India, as well as thoseof our customers and suppliers. Furthermore, severe terrorist attacks or actsof war may result in temporary halts of commercial activity in the affectedregions, and may result in reduced demand for our solutions. These developmentscould have a material adverse effect on our business and the trading price ofour common stock.

**As of****September****30, 2006, alimited number of stockholders own approximately 33% of our stock and may act,or prevent certain types of corporate actions, to the detriment of otherstockholders.**

Our directors, officers and greater than 5%stockholders own, as of September 30, 2006, approximately 33% of ouroutstanding common stock. Accordingly, these stockholders may, if they acttogether, exercise significant influence over all matters requiring stockholderapproval, including the election of a majority of the directors and thedetermination of significant corporate actions. This concentration could alsohave the effect of delaying or preventing a change in control that couldotherwise be beneficial to our stockholders.

**Our certificate of incorporation andbylaws and state law contain provisions that could discourage a takeover.**

We have adopted a certificate of incorporation andbylaws, which in addition to state law, may discourage, delay or prevent amerger or acquisition that a stockholder may consider favorable. Theseprovisions include the following:

·      establishinga classified board in which only a portion of the total board members will beelected at each annual meeting;

·      authorizingthe board to issue preferred stock;

·      prohibitingcumulative voting in the election of directors;

·      limitingthe persons who may call special meetings of stockholders;

·      prohibitingstockholder action by written consent; and

·      establishingadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted on by stockholders at stockholdermeetings.

We have adopted a certificate of incorporation thatpermits our board to issue shares of preferred stock without stockholderapproval, which means that our board could issue shares with special votingrights or other provisions that could deter a takeover. In addition to delayingor preventing an acquisition, the issuance of a substantial number of shares ofpreferred stock could adversely affect the price of our common stock and diluteexisting stockholders.

**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.**

**Interestrate risk**

We areexposed to the impact of interest rate changes and changes in the market valuesof our marketable securities. We have not used derivative financial instrumentsin our investment portfolio. We invest our excess cash in debt instruments ofhigh-quality corporate issuers and the United States government or itsagencies. Our investment policy limits the amount of credit exposure to any oneissuer and limits our investments to maturity dates of less than one year. Weare averse to principal loss and seek to preserve our invested funds bylimiting default risk, market risk and reinvestment risk. We mitigate defaultrisk by investing in high credit quality securities and by positioning ourportfolio to respond appropriately to a significant reduction in a creditrating of any investment issuer or guarantor. The portfolio includes onlymarketable securities with active secondary or resale markets to provideportfolio liquidity.

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Cash,cash equivalents and marketable securities in both fixed and floating rateinterest-earning instruments carry a degree of interest rate risk. Fixed ratesecurities may have their fair market value adversely impacted due to risinginterest rates, while floating rate securities may produce less income thanexpected if interest rates fall. Due in part to these factors, our futureinterest income may fall short of expectations due to changes in interest ratesor we may suffer losses if forced to sell securities that have declined inmarket value due to changes in interest rates.

Thetable below presents the carrying value and related weighted average rate ofreturn for our cash, cash equivalents and debt securities. The carrying valuesapproximate fair values as of September 30, 2006 and December 31, 2005. As of September30, 2006, debt securities consisted of $17.0 million with original maturitydates of 90 days or less and $77.5 million with original maturity dates ofgreater than 90 days. As of December 31, 2005, debt securities consisted of$25.8 million with original maturity dates of 90 days or less and $77.6 millionwith original maturity dates of greater than 90 days.
| ** **                                              | ** ** | **Carrying  value at  September 30,  2006** | ** ** | **Average  rate of  return at  September 30,  2006** | ** ** | **Carrying  value at  December 31,  2005** | ** ** | **Average  rate of  return at  December 31,  2005** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(in thousands)**                               | ** ** | **(annualized)**                                                    | ** ** | **(in thousands)**                              | ** ** | **(annualized)**                                                   | ** ** |
| **Cash,  cash equivalents and marketable securities**   | ** ** | ** **                                            | ** ** | ** **                                                          | ** ** | ** **                                           | ** ** | ** **                                                         | ** ** |
| Cash and cash  equivalents—variable rate           |       | $                                                     | 9,185      |                                                                | 4.2        | %                                                    | $          | 8,984                                                              |       | 2.8 | % |
| Money market  funds—variable rate                  |       | 5,548                                                 |       | 5.4                                                                 | %          | 7,030                                                |       | 3.6                                                                | %          |
| Cash and cash  equivalents—fixed rate              |       | 2,282                                                 |       | 5.3                                                                 | %          | 9,759                                                |       | 4.2                                                                | %          |
|                                                    |       |                                                  |       |                                                                |       |                                                 |       |                                                               |       |
| Total cash and  cash equivalents                        |       | 17,015                                                |       | 4.7                                                                 | %          | 25,773                                               |       | 3.6                                                                | %          |
| Marketable  securities—fixed rate                  |       | 77,458                                                |       | 5.2                                                                 | %          | 77,643                                               |       | 4.1                                                                | %          |
|                                                    |       |                                                  |       |                                                                |       |                                                 |       |                                                               |       |
| Total cash, cash  equivalents and marketable securities |       | $                                                     | 94,473     |                                                                | 5.1        | %                                                    | $          | 103,416                                                            |       | 4.0 | % |

 

**ForeignCurrency Exchange**

Wetransact business primarily in United States dollars. We are subject, however,to adverse movements in foreign currency exchange rates in those countrieswhere we conduct business. To date, the effect of fluctuations in foreigncurrency exchange rates on expenses has not been material. Operating expensesincurred by our subsidiary in India are denominated in Indian rupees. Thissubsidiary was formed in November 1999 primarily to perform research anddevelopment and customer support services. Operating expenses incurred by oursubsidiary in the United Kingdom are denominated in British pounds and euros.This subsidiary was acquired as part of the Vidus acquisition and performsresearch and development, sales and marketing, and customer service activities.Operating expenses incurred by our branch in Australia are denominated inAustralian Dollars. This branch performs sales and marketing and customersupport activities. Currently, cash generated in Australian dollars exceedsoperating expenses. Currently, operating expenses incurred in British poundsand Indian rupees exceed revenues generated in these currencies. A ten percentincrease in the average exchange rates of these currencies would likely decreaseour operating income by approximately 5.1%.

Wehold fixed-price agreements denominated in United States dollars with certainof our foreign-based suppliers: Orient Semiconductor Electronics, in Taiwan,which manufactures the Internet Location Manager; Siemens AG, in Germany, whichprovides the modem for some versions of the *i*LM;Taiwan Semiconductor Manufacturing Company, in Taiwan, which manufactures ourGPS digital receiver chips; and Micronet, in Israel, which supplies our *i*DT. Should there be a sustained increasein average exchange rates for the local currency in any of the foregoingcountries, our suppliers may request increased pricing on any new agreements.If this were to occur for all of these currencies and with each of thesesuppliers, a ten percent increase in average exchange rates could increase ourproduct costs by approximately 2.1%.

We donot use derivative financial instruments for speculative trading purposes, nordo we currently hedge any foreign currency exposure to offset the effects ofchanges in foreign exchange rates. Similarly, we do not use financialinstruments to hedge operating expenses of our subsidiaries in India or theUnited Kingdom.

**Item 4. Controlsand Procedures.**

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of theeffectiveness of our disclosure controls and procedures, as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”).  As part of our evaluation, we consideredfactors such as whether data, if any, concerning significant changes to ourbusiness, new agreements entered into during

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the quarter, changes inrelationships with suppliers and customers, new resource commitments,litigation matters, the material weaknesses described below and changes inaccounting interpretations were disclosed in connection with the disclosurecommittee’s investigation of such matters. In addition, we considered thecomments, if any, of process owners regarding their awareness of any mattersthat could give rise to additional disclosure.

Based on this evaluation,our principal executive officer and principal financial officer concluded thatas of the end of the period covered by this report and as a result ofthe material weaknesses in our internal control over financial reporting thathave not been fully remediated, as described below, our disclosure controls andprocedures were not effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by us in thereports that we file or submit under the Exchange Act, and were not effectivein ensuring that information required to be disclosed by us in the reports wefile or submit under the Exchange Act is accumulated and communicated to ourmanagement, including our principal executive officer and principal financialofficer, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

A disclosure control system, no matter how wellconceived and implemented, can provide only reasonable assurance that theobjectives of such control system are satisfied. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues, if any, within the company havebeen detected. The Company did design into its process safeguards to reduce,though not eliminate, this risk.

We previously described two material weaknesses in ourinternal control over financial reporting (as such phrase is defined in Rule13a-15(f) under the Exchange Act) in Item 9A, Controls and Procedures, of ourAnnual Report on Form 10-K/A for the fiscal year ended December 31, 2005.Public Company Accounting Oversight Board Auditing Standard No. 2 describes amaterial weakness as a significant deficiency, or combination of significantdeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.

In Item 9A, Controls and Procedures, of our AnnualReport on Form 10-K/A for the fiscal year ended December 31, 2005, wereferenced the remediation plan to help address the previously reportedmaterial weakness relating to non-recurring transactions. As of December 31,2005, we had not fully remediated that material weakness. During the secondquarter of 2005, we commenced implementation of a remediation plan tosupplement our existing processes to (a) identify internally such transactionsoccurring during a reporting period and (b) assess the accounting treatment tobe used in connection with those transactions. These supplemental elementsinclude (i) additional internal reviews of the underlying transactions andrelated accounting conclusions and (ii) the use of external consultingexpertise to provide additional advice relating to our accounting interpretations.The phrase “external consulting expertise” means that the Company would engagethe services of an independent registered public accounting firm or third partywith appropriate accounting knowledge and expertise.

In addition, we did not accurately calculate, orperform a timely review of, our provision for income taxes.  This deficiency in internal controlconstituted a material weakness. 

During the nine months ended September 30, 2006, weimplemented the following procedures to help address previously reportedmaterial weaknesses:

·      Wereviewed with the Audit Committee of the Board of Directors all accountingpolicies adopted or changed and significant management estimates; 

·      Weincreased our internal resources by adding additional certified publicaccountants to our finance staff; 

·      Weengaged external consulting expertise to assist management with its valuationand initial adoption of SFAS 123R and the preparation of the provision forincome taxes; and

·      Weincreased the level of review and discussion of significant tax matters andsupporting documentation with senior finance management.

During the quarter ended September 30, 2006, we continuedto follow the procedures described above to help address the previouslyreported material weaknesses. However, no change in our internal control overfinancial reporting occurred during the quarter ended September 30, 2006 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

Theremedial measures implemented by us to date will not in and of themselvesremediate the material weaknesses, and certain of these remedial measures willrequire some time to be fully implemented or to take full effect. Because ofthe inherent limitations in

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all control systems, no evaluation of controls canprovide absolute assurance that all control issues, including instances offraud, if any, have been detected. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected and could be material and require a restatement of ourfinancial statements. Over time, the controls and procedures we haveimplemented may become inadequate because of changes in conditions, or thedegree of compliance with policies or procedures may deteriorate. The actualefficacy of these initiatives and of our controls and procedures is subject toreview by our management, supported by confirmation and testing by ourmanagement.

If theremedial measures described above are insufficient to address the identifiedmaterial weaknesses, our financial statements may contain materialmisstatements. Among other things, any unremediated material weakness couldresult in material post-closing adjustments in future financial statements.

Inlight of the material weaknesses described above, we performed additionalanalysis and other post-closing procedures to ensure that the condensedconsolidated financial statements were prepared in accordance with accountingprinciples generally accepted in the United States of America. Accordingly,management believes that the financial statements included in this reportfairly present in all material respects our financial condition, results ofoperations and cash flows for the periods presented.

Thecertifications of our principal executive officer and principal financialofficer required in accordance with Section 302 of the Sarbanes-Oxley Actare attached as exhibits to this Quarterly Report on Form 10-Q. Thedisclosures set forth in this Item 4 contain information concerning theevaluation of our disclosure controls and procedures, and changes in internalcontrol over financial reporting, referred to in the certifications. ThisItem 4 should be read in conjunction with the officer certifications for amore complete understanding of the topics presented.

**PART II. OTHER INFORMATION**

**Item 1. LegalProceedings.**

Fromtime to time, we are subject to claims in legal proceedings arising in thenormal course of our business. Based on our evaluation of these matters, webelieve that these matters will not have a material adverse effect on ouroperations or financial position.

**Item 1A.Risk Factors.**

Except as set forth below, during the nine monthsended September 30, 2006, there were no material changes to the descriptions ofthe risk factors associated with our business previously disclosed inItem 1A of Part I of our Annual Report on Form 10-K/A for the year endedDecember 31, 2005 which is incorporated herein by reference.

**Our business is changing as agreater proportion of our business is coming from larger customers with complexrequirements. As a result, our revenues may be less predictable than ourhistoric installed base business.**

Larger customerstend to require new features or functionality beyond what is already generallyavailable in our solutions, integration of our solutions with existing systems,or other special terms or conditions.  Often,considerable work is required in order to develop such special features, tointegrate our solutions with a customer’s existing systems or to comply withother special conditions.  We may not beable to recognize all or a portion of the revenue related to a customer untilwe have completed development of the required new features, completed theintegration of our solutions with the customer’s existing systems or compliedwith other special conditions required. If we do not recognize revenue whenanticipated, total revenues would be negatively impacted and our financialresults would be harmed.

**An increasing portion of ourrevenue is attributable to larger customer contracts, and as a result, ourfinancial results may be harmed by special circumstances related to one or afew of these large customer contracts.**

In recent periods,an increasing portion of our revenue has been attributable to larger customercontracts which may require complicated development or implementation on ourpart before the customer accepts our products or solutions and we are able torecognize some or all of the revenue.  Ifwe fail to deploy our solutions or to complete necessary development work asand when required, or if we lose all or a portion of our business with anylarge customer, our financial results would be negatively impacted. 

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**Asubstantial portion of our revenue is attributable to a small number ofcustomers, the loss of any one of which would harm our financial results.**

For the three and nine months ended September 30,2006, three of our customers represented, in the aggregate, approximately 33%and 34%, respectively, of our total revenues. Approximately 16% of our total revenues for the three and nine monthsended September 30, 2006, were attributable to one customer, AT&T Inc. Theloss of a significant volume of business from any of these customers could beexpected to result in a material decrease in our total revenue and couldnegatively impact our financial results.

**Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.**

None.

**Item 3.Defaults Upon Senior Securities.**

None.

**Item 4.Submission of Matters to a Vote of Security Holders.**

None.

**Item 5.Other Information.**

None.

**Item 6. Exhibits.**
| 31.1   | Rule 13a-14(a)/15d-14(a)  Certification |
|--------|----------------------------------------------|
|   |                                         |
| 31.2   | Rule 13a-14(a)/15d-14(a)  Certification |
|   |                                         |
| 32.1   | Section 1350  Certification             |
|   |                                         |
| 32.2   | Section 1350  Certification             |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        | **@ROAD,  INC.**                               |
|--------|------------------------------------------------|
|   |                                           |   |   |
|   | By:                                            | /s/ Michael  Martini |   |
|   |                                           |
|   | Michael Martini                                |
|   | Chief Financial  Officer                       |
|   | (Principal  Financial and Accounting  Officer) |
|   |                                           |
|   | Date: November  7, 2006                        |

 

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***Exhibit Index***

**Exhibits**
| 31.1   | Rule 13a-14(a)/15d-14(a)  Certification. |
|--------|-----------------------------------------------|
|   |                                          |
| 31.2   | Rule 13a-14(a)/15d-14(a)  Certification. |
|   |                                          |
| 32.1   | Section 1350  Certification.             |
|   |                                          |
| 32.2   | Section 1350  Certification.             |

 

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